Irish Workers Are Slow To Embrace Pension Plan

By Quentin Fottrell, Dow Jones Newswires
November 10, 2003

With an average age of 35, Ireland has the youngest population in the European Union, and those born during its 1970s baby boom will come of pensionable age in 2035. While France and Germany struggle over changes, Ireland 's government has taken action. But its latest big idea -- Personal Retirement Savings Accounts, which aim to boost private pension coverage to 70% from 50% -- isn't proving to be the savings bonanza the government had hoped, according to figures released Friday.

PRSAs are aimed at the 500,000 workers believed to have no private pension . But banks and other pension providers report that the policies have sold poorly. According to Friday's figures, while nearly 51,782 employers have distributed information on PRSAs to their staffs, only 6,707 employees had taken out one of the accounts by the end of September.

The government launched PRSAs in February with little fanfare to encourage lower-income and self-employed workers to save for a rainy day. Charges are capped, and contributions are flexible and tax-deductible. The accounts are designed to be portable, allowing workers to take them from company to company.

But there's a problem: While employers are legally obliged to provide staffers with information about PRSAs, they aren't obliged to make any contributions to the accounts. And so, to pre-empt any employer apathy, the government told employers in September that if they don't distribute PRSA information to their staffs, they would risk fines of 12,700 ($14,600) or prison terms of as much as two years.

As hoped, employers signed up in droves -- but employees didn't.

"It's a slow burner," said a Pensions Board spokeswoman. "Unless you're in a company pension , people put pensions on the long finger. If they don't start now, they could end up with a state pension for 157 per week."

"In Dublin , 157 is a good night out," she added. "Those who are living on 157 have not enjoyed the luxuries of the Celtic Tiger. Irish society has become a consumer society about spending -- pensions are about saving."

Many economists say Irish people are still living for today rather than thinking about tomorrow. The Central Bank of Ireland recently said annual private-sector credit rose 14.7% in September, up from 14.6% in August.

What's worse, PRSAs are specifically designed to encourage low-income and self-employed workers to save for their golden years, but the pension accounts are actually proving confusing and unappealing to these very groups.

Alan Morton, director at Moneywise financial planning, believes the application process could be simplified. "There's also less incentive for workers if their employers aren't obliged by law to make any contribution," he said.

The irony is that there's no better option for low-income workers than PRSAs, which are a good deal for pensionless workers, he said. Participants get tax relief on contributions, which is 20% at Ireland 's lowest tax rate. Plus, charges are capped at 5% for entry and 1% annually for standard PRSAs. In a non-PRSA private pension plan, workers could pay as much as 50% in charges for the first year.

Irish Life & Permanent PLC's Irish Life unit, which claims to have as much as 40% of PRSAs, has criticized the government's marketing of the accounts. It says it has put "a lot of money" into promotion and talking to employers.

For its part, the government set aside 500,000, the Pensions Board said, for a "pensions awareness campaign, which is the first of its type in Ireland , which included a national pensions awareness week in October."

Despite what is seen as feeble marketing, Irish Life pensions marketing manager Tony Lawless said the group has sold more than 3,000 PRSAs. But he said the average premium has been 3,000 a year, suggesting that PRSAs are appealing to medium- and higher-income workers.

Still, Pensions Board Chief Executive Anne Maher is upbeat on the uptake for PRSAs thus far. "The figures represent a good start to a steady PRSA uptake and increased pension provision in Ireland ," she said.

PRSAs aren't the only step the Irish government has taken to avoid a pension cash crunch. In 1999, it set up a National Pension Reserve Fund, gleaning 1% annually of gross domestic product for the fund, which currently stands at more than 8.4 billion.

But with the latest PRSA figures, economists say the government will have to rethink its strategy. It should begin by forcing employers to make a PRSA contribution along with the employees who sign up, they say.

John Cunningham, general manager for group planning and marketing at Friends First, remains concerned for the country's baby boomers. " Ireland 's state pension won't allow workers to maintain their living standards. Alone, it's not enough."

Meanwhile, Monica Seery, a Dublin teacher and single mother, isn't convinced she should put money in a PRSA. "It's not just about the lack of employer contributions," she said. "If there was more time spent educating people about where contributions are invested, then maybe I'd take out a PRSA. In the meantime, I'm saving for a little house in the south of France ."


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