08 Sep 2016 | 10.58 am
‘Pension Gap’ Grows To €28 Billion
Aviva says retirement income will fall short without urgent action
08 Sep 2016 | 10.58 am
Ireland’s so-called ‘pension gap’ is now the second largest in Europe, according to an analysis by Aviva published today. The report claims that Irish people need to save an additional €27.8 billion a year to close the gap between current pension savings and the income needed to provide an adequate standard of living in retirement.
The insurance group’s Mind the Gap analysis of the pension savings gap across Europe indicates that the current generation of retirees – due to retire between 2017 and 2057 — will have to save, on average, an additional €12,200 (gross) per annum or €1,017 (gross) per month.
This takes account of the State Pension but excludes tax relief on pension savings. This is the second largest savings gap per head of population in the eight EU countries surveyed. The UK’s gap is the highest at €13,200 and Germany’s, at €11,600, ranks in third place.
The OECD says 70% of final salary is a reasonable benchmark for an adequate retirement income. Aviva has adjusted the benchmark in its analysis for different income levels: lower income earners are assumed to need 90% of their final salary to provide for their every day needs in retirement; mid-income earners are assumed to need 65% while high earners, who have disposable income beyond their everyday needs are estimated to need 55% of final salary.
Failing the introduction of a state-sponsored minimum income or a comprehensive national pension scheme, Aviva says the answer to the problem of poor pension coverage is the speedy introduction of a universal pension system under which all workers would automatically be enrolled in a pension scheme by their employers.
Introduced in the UK in 2012, a similar system has contributed to a fall of 4% in that country’s savings gap.
Several factors contributed to the 38% increase in the size of the gap in Ireland over the last six years:
- People are living longer and until labour force participation adjusts to this new reality, retirement income funding will remain under pressure
- The decline in long term yields and increasing longevity, is reducing the income retirees can expect from their pensions
- The State Pension was frozen from 2010 to 2015 and is now predicted to lag behind salaries
- The projected investment growth rate has been reduced to 3% from 5% in 2010, in line with Actuarial Standard Practices.
However, says Aviva, postponing the retirement age and increasing the State Pension would only reduce the gap somewhat and would be fruitless unless the decline in the numbers saving into a private pension is reversed. The latest CSO data show that the number of workers with pensions now stands at 46.7% compared to 51.2% in 2009.