Published: Wednesday, 10th March, 2010 5:00pm

Moneytimes with Jill Kerby

Expect to work longer for the state pension

Personal finance expert, Jill Kerby.

If you are age 61 today, and were counting on collecting your state pension in 2014, think again. Only those people who are 66 in 2014 will start receiving their pension, currently worth €230 per week.

By 2021, just 11 years from now, you'll need to have turned 67 before you get your pension; seven years later, in 2028 the retirement age will have risen to 68.

The pushing out of the state retirement age (and this will apply to all public and civil service workers as well) is something than cannot be put off, even if many of the other proposals in the just-published Pension Policy Framework document are put on the long finger due to the moribund economy.

Currently, there are six workers to every pensioner (though 5:1 may be more accurate ratio given the level of unemployment). In 40 years, that ratio will be to 2:1 and since the state pension is funded on a pay-as-you-go funding system, where current PRSI revenue is not ring-fenced for pensions but absorbed in the state coffers, there will not be sufficient money to keep paying pensions at their current rate.

It's hard to know what will happen to the state benefit if and when that scenario of the tripling of the pensioner population happens by 2050, but raising the retirement age to 68 will help to slow down the exploding of the pensions time bomb.

The other expectation is that pension benefits will have to reduce, especially if the health services bill rises in tandem (and it will).

No one should be too surprised in coming decades if the state pension is worth less than the 35% cash equivalent of the average industrial wage that it represents today.

It is for this reason too that the government has decided, from 2014, that the million or so workers who have made no pension provision other than their PRSI payments are automatically signed up to A new supplementary pension system, announced last week.

I have mixed feelings about this new soft-mandatory pension that will effectively be run by the government (worrying in itself).

Automatically signing people up to a pension scheme (but letting them opt out of it after three months), means that inertia will kick in and most people will remain signed up. It works in other countries - Australia, for example.

Yet setting the income contributions at just four per cent every year (from only a portion of the worker's income), two per cent from their employer and the same from the tax-payer, is not going to be enough to produce an adequate pension income unless the new pension holder is signed up from age 22 and lasts the course to retirement at 68.

There's also the danger that employers and workers, who are already paying higher contributions into expensive occupational schemes, will revert to this one; it's the classic race to the bottom syndrome.

Fees

There are no details about the administration charges and fund management fees that will have to be paid by workers, employers and taxpayers.

But this money will have to be shared by the new state quango, the "central processing agency" that will run this massive new pension scheme, and the hand-picked pension fund managers who will be given your money to invest.

Already, many people are questioning how the state can force people to save into a private pension scheme, given the appalling returns that so many private pension funds have delivered over in recent decades.

(The average return is just 0.2%; when inflation is factored in this amounts to an outright loss.)

There will be an opportunity to opt out of this new pension, but like with the original Lisbon Treaty vote, the government isn't going to take your no for a final answer. Refuseniks will be automatically signed up again every two years.

The waste of contributors' and tax-payers' money involved in that recurring charade over a potential 46 years is frankly, outrageous.

Meanwhile, employers who are unable for financial reasons or simply unwilling for competitive reasons to make pension contributions for the first time could also scuttle this scheme: one pension advisor said last week that he wouldn't be surprised if many unscrupulous employers put pressure on their employees to opt out of the scheme in exchange for a two per cent pay increase or just to keep their jobs

This is an imperfect proposal so far, with little detail or costing. The government's timing, when so many workers are already struggling, is bad and the 2014 lead-in time for the new scheme and many other proposals in the document is clearly aspirational.

There are other proposals which are worth doing, like no longer forcing defined contribution pension members to buy annuities when they retire, that are welcome and could happen sooner than later. I'll return to some of them in future column.

In the meantime, all our pension cards have been marked. Everyone needs to save and invest more for longer, and to educate themselves about the best asset choices for their needs and that's going to be as big a personal challenge as the one the government has just taken on.

• Get in touch with the author of this column at: jill@jillkerby.ie.