Assessing retirement readiness in Ireland Damian Fadden Irish Life - PowerPoint PPT Presentation

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? Does the system encourage a level of savings that Standard of allow households to move into retirement without living having to materially reduce their standard of living? adjustment Are the current system promises sustainable for future generations given projected changes in System demographics and uncertainty of future market sustainability returns? McKinsey & Company | 1

1 st 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 | 2

Poverty rates across select OECD countries Percentage of individuals with equivalent incomes less than 50% of national median, 2012 1 Among 65+ Among all age groups 33.5 21.5 19.4 17.6 16.0 14.0 13.4 12.7 11.8 10.5 9.3 9.4 9.4 9.0 8.4 8.4 8.1 7.9 6.9 6.7 3.8 2.0 Netherlands France Canada 1 Ireland Sweden Germany Italy UK Japan 1 US Australia 65+ vs. overall -5.9 -5.9 -4.3 -4.3 -5.1 -5.1 -1.5 -1.5 +0.3 +0.3 +1.0 +1.0 -3.3 -3.3 +2.9 +2.9 +3.4 +3.4 +3.9 +3.9 +19.5 +19.5 population 1 Data for 2011 or latest available McKinsey & Company | 3 SOURCE: OECD 2011/12, most recent data available at time of publication

2 nd 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 | 4

McKinsey’s Retirement Readiness Index (RRI) Life Assets Retirement expectancy 2 Post-retirement Project future RRI = annual retirement consumption Post- retirement 2 savings and consumption ▪ Pillar I and II government assets programs ▪ Pillar Ill and IV ▪ Excludes Pillar V Starting point Pre- retirement 1 (home equity) Project pre- 1 consumption Complete financial retirement situation of Irish households – incomes, An RRI of 100 annual financial assets, pension corresponds to coverage, contribution consumption rates, etc. full replacement Age 66 83+ Projected average Current national average with retirement age 1 projected increase over time 2 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 | 5

Base 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 retirement 299K 7K DB Plan 27K ARF 0 Annuitised 10K pillar III assets Term Savings Dep. 7K 3K Taxes Post-retirement Mutual 6K Stocks Pillar IV consumptions 49K funds 0 0 Pillar IV assets @ Annuitised Bonds Other Pillar IV ass. 7K 0 retirement1 pillar IV assets 17K 98K 2 6K Liabilities 0 Real estate 250K Pillar V Pillar V assets Annuitised RRI Pillar V assets 140 250 290K 0 in retirement pillar V assets Business equity 0 Pre-retirement Current household income Pre-retirement (after tax) income 72K 54k Current income income 74k Consumption Growth rate rate Pre-retirement 86% Taxes (retirement age-current age) <1% 20k consumptions 35K Mortgage pmts.1 12k 1 Assumed that once mortgage is paid off this amount is saved every year 2 Tax free lump-sum for public sector workers is applied McKinsey & Company | 6 SOURCE: Retirement Readiness Model 2015 - Respondent ID: 12,217

Distribution of retirement readiness scores in Ireland Percentage of Irish households; RRI score 0 50 100 150 200 250 300 RRI score McKinsey & Company | 7 SOURCE: Retirement Readiness Index Model 2015

How much is enough in retirement? Min RRI Min RRI (med-high income (low income – Q1) Q2-Q5) Income replacement rates required of 73- General rule used 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 retirement 1 Survey data on ~60-70 based on those survey respondents 3 actual retired who decreased consumption (Q1: 70%;Q2: 70 60-66 67%; Q3: 72%; Q4: 60%; Q5: 66%) spend 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 McKinsey & Company | 8 SOURCE: OECD library indicators 2013, Vincentian Partnership, Central Bank of Ireland, Canadian RRI analysis, RRI 2015

29% 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 McKinsey & Company | 9 SOURCE: Retirement Readiness Index Model 2015

Percentage 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 quintile 1 23K EUR Q3 56 60 65 54 35K EUR Q4 55 65 58 51 54K Q5 65 73 71 62 EUR 101K (highest) 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. McKinsey & Company | 10 SOURCE: Retirement Readiness Index Model 2015

Median RRI score by quintile and pension plan type Defined benefit Other pension 3 127 Defined contribution No pension 117 114 110 106 104 103 103 98 92 87 86 85 76 75 73 70 60 58 53 Q1 Q2 Q3 Q4 Q5 (lowest) (highest) Income quintile 1 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 McKinsey & Company | 11 SOURCE: Retirement Readiness Model 2015

3 rd 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 | 12

Projected Social Insurance Fund receipts and deficits (2012 estimates) EUR billions Deficit Receipts 44.7 36.4 23.9 26.0 19.5 11.6 17.4 5.6 12.1 11.6 11.1 10.5 10.1 9.7 3.2 3.0 20.8 2.7 2.4 2.2 2.0 16.9 14.4 11.8 8.9 8.6 8.4 7.9 8.1 7.7 2015 16 17 18 19 20 30 40 50 2060 Note: Assessment does not include effect of recent changes to benefit eligibility. McKinsey & Company | 13 SOURCE: Actuarial review of the Irish pension system

Options 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 by 2035, contributions contributions would impact economy Increase 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 | 14

Effect that a 35% reduction of SPC and SPNC would have on retirement readiness Percent of Irish households; RRI Score 1 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 McKinsey & Company | 15 SOURCE: Retirement Readiness Index Model 2015