Although there is a more positive outlook for the life assurance and pensions market this year, JP Hughes cautions that consumers need to re-engage in making financial provisions for their future.
The life assurance sector is something of a bellwether of the economy – if the economy is doing well, the life assurance sector tends to do well, and vice versa. Back in 2006 and 2007, the life assurance industry was a beneficiary of the excesses of the Celtic Tiger. Many consumers were investing their own funds and indeed borrowed funds in all sorts of assets.
All of that changed dramatically with the onset of the global financial crisis and the recession. Life companies are impacted in two ways by an economic downturn. Firstly, fewer new customers buy protection or health insurance policies or invest in new pension or savings products. As a result, sales of new life products declined by 65% between 2008 and 2012.
In addition, many customers who took out policies before the recession were struggling to meet their financial commitments in recent years and so an increasing number either reduced the amount of their premiums or cancelled their policies altogether.
The level of policy cancellations was also influenced by an increasing level of rebrokering or reselling, some of which was not always for the benefit of customers. This issue abated somewhat in 2013.
While the life market stabilised in 2013 and new sales were up 7% compared to 2012, we were starting from a low base and it will be a long time before we see the level of new business experienced in 2007.
Signs of improvement
While still challenging, the economic outlook for Ireland is more positive than we have seen since 2008. The key factors which impact on the economy here are improving, and provided policymakers continue to provide stimulus for as long as required, a gradual expansion of economic activity is likely here and internationally.
For consumers, the labour market is improving slowly, disposable incomes are growing and consumer confidence is at a six-year high; albeit from a very low base. All of these factors will have a positive impact on not only our industry but others as well.
How is the Government going to continue to fund the existing €11,976 per head per annum for an increasingly ageing population?
It is very encouraging to see clear signs of an increase in business activity and consumer spending, but we must be mindful that disposable income remains constrained because of the austerity measure and so spend on long- term financial products will continue to reflect this in 2014.
On balance, we are projecting c.10% market growth in new in 2014 and continued gradual growth into 2015. We also believe that the level of policy cancellation will reduce marginally as more customers look to retain their necessary benefits.
Long-term planning
As an industry, we advocate that consumers make proper financial provisions for unforeseen life events and their future, especially after retirement. But we are increasingly concerned that there is an excessive short-term focus among many of those who are employed.
Research Friends First undertook last year indicates that when many consumers examine their finances, life and health assurance products and funding for old age are not coming out very high on their list of priorities. It’s a choice each person has to make and there are still significant ‘affordability’ issues for most consumers, but unfortunately there will be adverse lifestyle issues for many in the future if they do not fund adequately for their retirement.
Less than 50% of those in employment have any form of pension, and this figure is just 40% if we exclude those in public sector employment. At least half of those in employment will rely exclusively on the State pension in retirement. But those eligible for a State pension on retirement will now have to wait longer to receive it – aged 66 for those retiring from 2014 onwards.
The age change affects those born on or after January 1st 1948, and more increases in the qualifying age for the State pension are due to come into effect over the coming years. It will increase to 67 years in 2021 and to 68 years in 2028. So it is possible that a large proportion of employees will be retired from their jobs for a number of years before they are eligible for a State pension.
Given that the State pension is funded from current Government revenues, the issue remains as to how the Government can continue to fund the existing €11,976 per head per annum for an increasingly ageing population.
A Department of Social Protection issued report in 2012 estimated that there is currently a significant annual shortfall of €1.5bn in the social insurance fund to pay existing social welfare/State pensions. Unless this benefit is reduced materially, this short fall will increase exponentially with no means for the government to fund it. And assuming this level of payment is reduced, it will make it more challenging for retirees without any private pension to live in retirement.
Pension time bomb
The pensions’ issue or time bomb is as real in Ireland as it is in any other developed economy, albeit not as large as countries with relatively older populations. In Census 2011, the CSO estimated that almost 34% of the population was under the age of 25 and over 50% was under the age of 35.
The CSO is projecting that the over-65 age group in Ireland is set to grow from 532,000 in 2011 to between 850,000 and 860,700 by 2026, and to almost 1.4 million by 2046. This ageing population and the increase in longevity have massive implications for demand and funding for health services and State pensions. The Department of Finance recently projected that ‘age related expenditures’ would increase from 26.6% of GDP in 2010 to 33.6% by 2060. While these are only projections, the implications are very clear and very stark – we need to address the pensions’ time bomb and the crisis in the delivery of health services as quickly and effectively as possibly.
Auto-enrolment
An OECD Report in 2012, and a number of subsequent reports by relevant bodies in Ireland which have been well documented in the media, have recommended the introduction of some form of compulsory pension for those in employment without a pension to address the current lack of pension coverage. While we are in principle supportive of some form of compulsion to address the coverage issue, we would prefer a form of soft compulsion – known as auto-enrolment – that provides opt outs for lower paid workers, which would set contribution levels at low rates at commencement and will provide some flexibility in accessing funds pre-retirement.
As noted there are still ‘affordability’ issues for many employees, while many existing pension holders now lack trust in private pensions. So any new system must ensure that the funds invested are ring fenced and not subjected to any further levies; that the funds are invested in a prudent manner; and are not subjected to excessive charges.
Less than 50% of those in employment have any form of pension, and this figure is 40% if we exclude those in public sector employment.”
There is sufficient international evidence that auto-enrolment schemes do increase coverage but the degree of success is sensitive to the specific design of the scheme. If the benefits are not attractive, or difficult to communicate, take up by employees will be limited. Although not an auto-enrolment scheme, we have also seen how the introduction of PRSAs in Ireland failed to meet initial expectations. Significant effort was expended in ensuring that all employers were obliged to provide access to a pension or PRSA facility through payroll deduction. Tax incentives were the main incentive to encourage take up, but although access to pensions was significantly increased, take up by employees was slow, mainly because there was no requirement for employer contributions.
Engagement
JP Hughes, chief commercial officer at Friends First
The challenge for the life sector as the economy gradually improves in 2014 and beyond is to re- engage with more customers and employees to convince them of the merits of our services and products – supported by independent financial advice provided by financial advisers or brokers. This may sound like a simple product push message from a representative of a product provider, but what I have tried to highlight in this article is the inevitable social and financial cost of employees doing nothing to plan for the future and relying solely on the State.
Resolving issues such as the pension’s time bomb should not be left just to employees or government. All stakeholders including the life and pensions industry and employer bodies need to engage now in solving or at least mitigating a long-term problem.
As a provider we are well aware that in order to gain or regain the trust of consumers – we must also change and provide simpler, better value for money and more transparent products which the consumers can understand and which are supported by unbiased financial advice to the degree possible where their long-term financial planning needs can be met.
