In the latest edition of Construction Magazine, Frances McNally writes about the need for a plan when planning for your retirement.
It is simply amazing how much our world has been turned upside down in the space of a year – social distancing, remote working and nationwide lockdowns were unknown phrases before March 2020. Nobody could have predicted the changes to our economy and the strength and flexibility of a construction sector, which rose to meet the new challenges posed by this pandemic. Nearly every facet of our lives has been changed.
Except our pensions
A good indicator of investment markets is the S&P500 index of shares, which started 2020 at 3,257 points. It grew at a steady pace up until 19th February, when uncertainty over Covid-19 began to emerge. Over the next five weeks, the index plummeted by almost 34% to 2,237 points on 23rd March. By 16th November, the S&P500 index had reached a new all-time high of just over 3,600 points, an increase of 10% in the year to date and a staggering 60% increase from the low point in March.
Investors who stayed the course saw their funds recover and, what’s more, those who exited near the bottom have missed an incredible recovery. This demonstrates the importance of taking a long-term approach to pensions and not trying to time the markets.
What about Brexit?
Brexit is another new word that seems to have been on our horizon forever at this stage. Again, we do not have a crystal ball to help us estimate the impact of Brexit on pension funds, but we come back to the message that it is impossible to try and time markets.
Brexit may or may not have some impact on your pension investments, but it is worth remembering it will likely only affect a relatively small part of a globally diversified portfolio of stocks. Try to avoid stressing over every small move in markets, but rather, stick to your long-term plan. As pension specialists, we believe that diversity is the best protection you can have against market volatility. Align your investment strategy with your risk appetite, and let the funds work with the full benefit of time.
The State of State Pensions
We were correct about one prediction we made last year. This related to the unfunded pension liabilities owed by the Irish State. These are the promises made in the form of State old-age pensions and public-sector pensions, and the last published estimate of this liability stood at €345bn in 2015. This issue is only getting worse, as over the next 30 years the ratio of people working and paying into the State to pensioners receiving pensions from the State scheme will fall from 5:1 to 2:1.
The last Government’s response was to push out the State pension age to 67 years of age (from January 2021) and 68 years of age from 2028. We were also expecting to see the introduction of auto-enrolment into pension schemes from 2022. As we anticipated, both of these measures have lost their way. Pushing out the pension age became a major election issue and was quickly shelved, and the State pension age will remain at 66 years of age from January 2021.
A new Commission on Pensions is being established to review this issue and will no doubt add to the delays. The so-called ‘pensions timebomb’ is only getting more explosive as time goes by, and action must be taken to ensure that future generations can guarantee a minimum standard of living in retirement.
What to do in 2021?
The State will not deliver the lifestyle you want in retirement, so it’s up to all of us to fund this for ourselves. To do this, you need to make a plan about how you are going to fund your retirement and stick to this plan. Short-term volatility will happen, but remember your retirement plan is a long-term plan. Have an investment strategy that matches this timeframe.
The team in Construction Executive Retirement Savings (CERS) look forward to working with the construction industry to secure the pension needs of the sector in the years and decades to come, helping you to achieve the retirement you deserve.
Frances McNally is the manager of CERS. If you would like to find out more about how CERS can deliver a flexible and bespoke scheme to meet the needs of your organisation, please contact them at info@ cers.ie, or by phone: 01 407 1430.