Private-sector workers warned on pensions

Thousands of private-sector workers will find themselves living on paltry pensions unless they increase their contributions dramatically.

A report by the Society of Actuaries in Ireland says even those people who are making some provision for their retirement may not be taking account of the need to adjust contributions to allow for changing circumstances.

The comments relate to defined-contribution schemes, where the eventual pension is dependent on the amount contributed and how the performance of investments into which it is put.

Such schemes are becoming increasingly popular with employers burdened by new solvency and accounting rules regarding defined-benefit pension liability.

These have been exacerbated by a dramatic fall in investment performance, which has seen average Irish pension funds recording a loss for each of the past three years.

Just 10 years ago, defined-contribution schemes accounted for 15 per cent of the market but this has more than doubled to 32 per cent and, if public-service employees are excluded, the figure is close to half the workforce.

The warning comes just days before the Pensions Board announces details of the institutions that have won approval to offer personal retirement savings accounts (PRSAs), the Government's attempt to target those with little or no pension provision outside of State benefits. PRSAs will be defined-contribution products.

A survey by the Irish Association of Pension Funds said that people in defined-contribution schemes were contributing an average 10 per cent of their gross salary each month. This would leave people well short of the minimum recommended standard of pension provision - 50 per cent of gross pre-retirement income, including the State pension.

"In many cases, individuals are insufficiently aware of the amounts needed to save in order to provide an adequate level of income in retirement," the report states.

The actuaries say life expectancy is increasing rapidly, raising the cost of a pension. Falling interest rates are also boosting the cost of provision. This double whammy comes at a time when investment returns are falling.

The report says the level of contributions by many people to such schemes does not reflect their circumstances. Contributions in many defined-contribution plans do not match those they have replaced in defined-benefit plans.

The figures put forward by the Society of Actuaries suggest that someone on a salary of €30,000 starting a pension at the age of 30 would need to contribute 10 per cent of gross income to achieve retirement income of €15,000 including the State pension.

The same consumer, looking for the more generally targeted two-thirds pension, would have to contribute 17 per cent of gross salary.

The proportion rises the later the pension is begun and the higher the salary level, as the State pension minimises the funding requirement for those on lower incomes.

The figures assume investment growth of 6 per cent per annum and a pension rising by 3 per cent each year after retirement and a half-pension to a spouse who survives the contributor.