Assessing retirement readiness in Ireland - Damian Fadden Irish Life
←
→
Page content transcription
If your browser does not render page correctly, please read the page content below
Assessing retirement readiness in Ireland Damian Fadden Irish Life CONFIDENTIAL AND PROPRIETARY Any use of this material without specific permission of McKinsey & Company is strictly prohibited
3 main dimensions against which to assess pension systems
Does the system provide an appropriate absolute
Poverty in
minimum income level for retirees to remain out of
retirement
poverty?
Standard of Does the system encourage a level of savings that
living allow households to move into retirement without
adjustment having to materially reduce their standard of living?
Are the current system promises sustainable for
System future generations given projected changes in
sustainability demographics and uncertainty of future market
returns?
McKinsey & Company | 11st dimension: Poverty in retirement
Poverty rate in retirement stands at 6.9%, lower than
Poverty in most large OECD countries
retirement Poverty rate in retirement is lower than poverty rate of
overall population (8.4% according to the OECD)
McKinsey & Company | 2Poverty rates across select OECD countries
Percentage of individuals with equivalent incomes less than 50% of national median, 20121
Among 65+
Among all age groups
33.5
21.5
19.4
17.6
16.0
14.0
11.8 12.7 13.4
10.5
9.3 9.0 9.4 9.4
7.9 8.1 8.4 8.4
6.7 6.9
3.8
2.0
Netherlands France Canada1 Ireland Sweden Germany Italy UK Japan1 US Australia
65+ vs.
overall -5.9 -4.3 -5.1 -1.5 +0.3 +1.0 -3.3 +2.9 +3.4 +3.9 +19.5
population
1 Data for 2011 or latest available
SOURCE: OECD 2011/12, most recent data available at time of publication McKinsey & Company | 32nd dimension: Standard of living adjustment
Poverty rate in retirement stands at 6.9%, lower than
Poverty in most large OECD countries
retirement Poverty rate in retirement is lower than poverty rate of
overall population (8.4% according to the OECD)
While 71% of working households are on track to retire
Standard of without significant adjustment, 29% are not
living
Most of the households that are not on track are mid- to
adjustment high-income and do not participate in a pension plan
McKinsey & Company | 4McKinsey’s Retirement Readiness Index (RRI)
Assets Life
Retirement
expectancy
Project future 2 Post-retirement
annual RRI =
retirement
savings and consumption 2 Post- retirement
consumption
▪ Pillar I and II government
assets programs
▪ Pillar Ill and IV
▪ Excludes Pillar V
Starting point (home equity) 1 Pre- retirement
Complete financial 1 Project pre- consumption
situation of Irish
households – incomes,
retirement
financial assets, pension annual An RRI of 100
coverage, contribution corresponds to
rates, etc. consumption full replacement
Age
66 83+
Projected average Current national average with
retirement age1 projected increase over time2
1 Increasing to 67 in 2021 and 68 in 2028
2 Conservative estimate given that male life expectancy is 78 and female is 83 according to the CSO
McKinsey & Company | 5Base case example: 2 adults (35 and 30 years old); 2 incomes Not included in base scenario
Pillar I & II
Social welfare 0
Pillar I
SNPC 0
Expected payout from
employee plan 0K
Pillar II SPC 12K
Pillar III
Pillar III assets @
PRSA contributions
7K retirement 299K
DB Plan
27K
ARF
0 Annuitised
pillar III assets 10K
Term
Savings
7K Dep. 3K
Mutual Taxes 6K Post-retirement
Stocks
Pillar IV
funds 0 0 consumptions 49K
Bonds Other Pillar IV assets @ Annuitised
0 7K Pillar IV ass.
17K retirement1 98K2 pillar IV assets 6K
Liabilities
0
Real estate
250K
Pillar V
Pillar V assets Annuitised RRI
Pillar V assets 250 290K 0 140
in retirement pillar V assets
Business equity
0
Pre-retirement
Current household income Pre-retirement
72K (after tax) income 54k
Current income
income 74k
Consumption
Growth rate Pre-retirement
Taxes rate 86%
(retirement age-current age)Distribution of retirement readiness scores in Ireland
Percentage of Irish households; RRI score
0 50 100 150 200 250 300
RRI score
SOURCE: Retirement Readiness Index Model 2015 McKinsey & Company | 7How much is enough in retirement?
Min RRI
Min RRI (med-high income
(low income – Q1) Q2-Q5)
General rule used Income replacement rates required of 73-
75 35
1 by OECD (for 75% (low income), and 24-35% (high (on income) (on income)
income) income)
Analysis of Household consumption analysis suggests
2 compressibility by ~75% of household expenditure is not 75 75
type of expense compressible at retirement1
Survey data on ~60-70 based on those survey respondents
3 actual retired who decreased consumption (Q1: 70%;Q2: 70 60-66
spend 67%; Q3: 72%; Q4: 60%; Q5: 66%)
In Canada, 80% of income not
4 Other countries compressible for quintile 1 and 65% for 80 65
quintiles 2-5
75 65
1 75% based on team analysis - data from Central Bank, Vincentian Partnership for Social Justice, and OECD
SOURCE: OECD library indicators 2013, Vincentian Partnership, Central Bank of Ireland, Canadian RRI analysis, RRI 2015 McKinsey & Company | 829% of Irish households are not on track
Percentage of Irish households; RRI score
At-risk
RRI < threshold:
29% of households
On-track
RRI > threshold:
71% of households
0 50 100 150 200 250 300
RRI score
SOURCE: Retirement Readiness Index Model 2015 McKinsey & Company | 9Percentage of households on track for retirement by income quintile and
age group
Age group
25 - 34 35 - 44 45 - 54 55 - 64 Avg. income
Q1 EUR
94 96 93 99
(lowest) 13K
EUR
Q2 68 81 74 78
Income quintile1
23K
EUR
Q3 56 60 65 54
35K
EUR
Q4 55 65 58 51
54K
Q5
(highest) 65 73 71 62 EUR 101K
Share of working-
24 37 19 19
age population
1 Household income cut-offs: Q1 < EUR 19K, Q2 < EUR 30K, Q3 < EUR 43K, Q4 < EUR 65K, Q5 > EUR 65K.
SOURCE: Retirement Readiness Index Model 2015 McKinsey & Company | 10Median RRI score by quintile and pension plan type
Defined benefit Other pension3
Defined contribution No pension
127
117 114 110
103 106 103 104
98
92
86 85 87
73 76 75
70
58 60
53
Q1 Q2 Q3 Q4 Q5
(lowest) (highest)
Income quintile1
1 Household income cut-offs: Q1 < EUR 19K, Q2 < EUR 30K, Q3 < EUR 43K, Q4 < EUR 65K, Q5 > EUR 65K
2 Sample size of 1,651. Q1: 127, Q2: 204, Q3: 323, Q4: 326, Q5: 316. 320 respondents received government transfers; 35 had invalid responses
3 PRSAs or other private pension plans
SOURCE: Retirement Readiness Model 2015 McKinsey & Company | 113rd dimension: System sustainability
Poverty rate in retirement stands at 6.9%, lower than
Poverty in most large OECD countries
retirement Poverty rate in retirement is lower than poverty rate of
overall population (8.4% according to the OECD)
While 71% of working households are on track to retire
Standard of without significant adjustment, 29% are not
living
Most of the households that are not on track are mid- to
adjustment high-income and do not participate in a pension plan
State pension is unsustainable; before recent eligibility
chances, deficit projected to stand at 35% of benefits
System in 2035
sustainability
Similar sustainability challenge with public sector
pensions
McKinsey & Company | 12Projected Social Insurance Fund receipts and deficits (2012 estimates)
EUR billions
Deficit Receipts
44.7
36.4
23.9
26.0 19.5
17.4 11.6
11.6 12.1 5.6
10.1 10.5 11.1
9.7 3.2
2.2 2.4 2.7 3.0 20.8
2.0 16.9
14.4
11.8
7.7 7.9 8.1 8.4 8.6 8.9
2015 16 17 18 19 20 30 40 50 2060
Note: Assessment does not include effect of recent changes to benefit eligibility.
SOURCE: Actuarial review of the Irish pension system McKinsey & Company | 13Options to address the projected Social Insurance Fund deficits
Range of
possible options
Description Implications
To eliminate future deficit Share of working population with
by 2035, benefits would RRI score above minimum threshold
need to be reduced by would go down to only 50% if no
Reduce ~35% (including changes other measure is adopted in parallel
future to benefit eligibility already
Need for other parallel measure
benefits implemented)
encouraging private pension
savings (e.g., mandatory auto-
enrollment)
To eliminate future deficit Material increase in SIF
Increase by 2035, contributions contributions would impact economy
would need to be and would limit ability to introduce
contributions increased by ~5% of other measures to boost savings
income for all workers
McKinsey & Company | 14Effect that a 35% reduction of SPC and SPNC would have on retirement
readiness
Percent of Irish households; RRI Score1
At-risk
RRI < threshold:
52% of households
On-track
RRI > threshold:
48% of households
0 20 40 60 80 100 120 140 160 180 200 220 240 260 280
RRI score
1 ~3% of households have an RRI of greater than 300 and are not shown
Note: Calculations based on weighted data
SOURCE: Retirement Readiness Index Model 2015 McKinsey & Company | 15Summary assessment of Ireland’s retirement system
Poverty rate in retirement stands at 6.9%, lower than
Poverty in most large OECD countries
retirement Poverty rate in retirement is lower than poverty rate of
overall population (8.4% according to the OECD)
While 71% of working households are on track to retire
Standard of without significant adjustment, 29% are not
living
Most of the households that are not on track are mid- to
adjustment high-income and do not participate in a pension plan
State pension is unsustainable; before recent eligibility
chances, deficit projected to stand at 35% of benefits
System in 2035
sustainability
Similar sustainability challenge with public sector
pensions
McKinsey & Company | 16Implications
Define the solution to the system sustainability
challenges first as it will inevitably have an impact on needs
for pension coverage and for additional personal savings
Encourage savings as Irish workers will need to put more
aside in the future
Preserve the elements of the system that are
currently working well – amongst others a State Pension
system that provides universal coverage to many individuals and
a private pension system that allow many households to save
sufficiently for retirement
McKinsey & Company | 17Thank You
McKinsey & Company | 18Appendices
McKinsey & Company | 19The pillars of the Irish retirement system
Total assets1
Components EUR billions
Pillar I
▪ State pension, non-contributory (SPNC)
▪ Means-tested increase for qualified adult
20
Pillar Il ▪ State pension, contributory (SPC)
▪ Occupational DB plans 90
▪ Occupational DC plans
Pillar Ill
▪ Personal retirement savings accounts (PRSAs) 19
▪ PRBs/buyout bonds
Pillar IV ▪ All non-registered financial assets 320
Pillar V
▪ All residential and investment real estate
564
▪ AIl private businesses
Total
1 Estimates based on most recent data available.
~ EUR 1 trillion
SOURCE: OECD review of the Irish Pension System, 2014; National Pensions Reserve Fund Commission Annual Report and Financial
McKinsey & Company | 20
Statements; IAPF; Eurostat; Central Statistics Office; The Pensions Authority; Department of the EnvironmentAssumptions used for our retirement readiness assessment in Ireland
Assumptions Rationale
▪ Real growth / investment rate of 2.25% ▪ In line with the real growth / performance of IL funds
Financial ▪ 0% liquidity of primary residence and 100% liquidity of ▪ Assumption that households do not sell their primary
growth & investment properties residence in retirement; Investment properties have
real estate more potential to be liquidated
▪ Real mortgage rate of 3% (5% minus inflation of 2%) ▪ Expected rate given tracker & variable rate split
▪ Male and female life expectancy of 85 ▪ Conservative estimate given male expectancy of 83
▪ Phased retirement age of 65, 66, and 67 depending on ▪ As per approved legislation
Demo-
current age
graphics
▪ If public sector years > private sector then respondent ▪ Allows for classification of individuals who have
defined as “Public sector”1 worked in both sectors
▪ USC, PRSI, and SPC calculated w/ 2015 rules ▪ As per most recent tax rules
Government
▪ SNPC simplified – eligible if income < 12K ▪ Simplified given complexity of means testing rules
taxes & state
pensions ▪ Current PRSI contribution estimated to be average ▪ In line with public pension system’s reliance on last 10
contribution for last 10 years years of contributions
Public sector ▪ 1 time tax-free lump-sum payment in retirement for DB ▪ To reflect current policy of salary*(30/8)*(# years)
pensions public sector workers of up to 1.5x salary
▪ 20% decrease in payout of private sector DB plans ▪ As ~40% of private plans are not funded
Private ▪ As per pension rules
▪ One-time tax-free lump-sum payment of DB plans
pensions
(1.5x salary) and ~25% for occupational pensions
▪ Consumption compression of 25% for Q1 and 35% for ▪ As observed in survey data and external sources
Q2 – Q5 (i.e. RRI threshold of 65-75) ▪ In line with industry average annuity products
Annuitisation ▪ Pillar IV assets annuitised in retirement at 1.5%
of assets & ▪ As long as non-mortgage debt is not significant (< than
consumption
▪ If non-mortgage debt isPublic sector pension deficit of ~€1.5bn expected to rise to ~€7.9bn by
2058 assuming current public sector pension levy is maintained
Deficit Pension levy (PRD) income Standard contribution
Net outflow/expenditure for public sector pensions1
€bn ▪ Cumulative
14.6 deficit by 2058
of €157bn
▪ Deficit could rise
10.1 7.3
to €11.9bn
without pension
7.5 4.2 levy
11.9
5.8 contributions
2.9
4.3 2.5 4.6 ▪ Updated
3.7
2.0 2.9 estimates2 in
2.1 2012 found
1.5 2.7
1.2 1.7 2.2 accrued
0.8 liabilities had
2018 28 38 48 2058 decreased by
~16%
1 Assessment from Comptroller and Auditor General Report (2009)
2 Updated actuarial review conducted by the Department of Public Expenditure and Reform
SOURCE: Comptroller and Auditor General Special Report (2009) McKinsey & Company | 22You can also read
