The jury is still out as pensions sector gears up for introduction of PRSAs

According to most experts in the field, they are a great idea but they won't work, writes Laura Slattery.

Paying into a pension means taking a 30- or 40-year view and not focusing on any one year. But 2002 has been a more eventful year for pensions than most.

Turbulent, depressed markets led to a fifth of the value of managed pension funds being wiped out by the end of September, although there has been some positive signs of recovery since then.

In Britain, the rate of closure of defined-benefit company schemes doubled. In these schemes, employees are guaranteed a pension based on a proportion of their final salary.

If the same happens here, it would effectively mean more risks and fewer guarantees for Irish workers as they build up their pension funds.

The first half of 2002 also brought significant legislative changes with the passing of the Pensions (Amendment) Act, which promises to change the pensions landscape through the introduction of Personal Retirement Savings Accounts (PRSAs).

These will be introduced next year and promoted through a National Pensions Awareness Campaign.

PRSAs are described as a welcome addition to the pensions market: intelligent, flexible products with the laudable aim of making it easier for people without the comfort of a company scheme - including part-time workers and homemakers - to save for their retirement in a tax-efficient way.

According to most pensions experts, PRSAs are a great idea, but they won't actually work. Rather than targeting a new market and boosting pensions coverage in the Republic from 50 per cent up to 70 per cent of workers, they may simply replace personal pensions and some company schemes.

The biggest block to taking out a pension is, quite simply, not being able to afford it. Can PRSAs change this fact?

The new pension product has two things in its favour. First, charges on standard PRSAs are capped at a fairly low level.

Second, holders can start and stop making contributions whenever they want. Both of these features also bring their own complications, however.

Standard PRSAs will put downward pressure on insurance brokers' commissions because they are such a low-margin product for life assurance companies, according to Mr Jim Murphy, director of actuarial consultants Life Strategies.

"It's not going to happen overnight but, certainly, there will be more pressure on commissions. And you have to ask, is that a good thing for consumers? There is a danger that the advice process will get squeezed out of the equation and people will end up not providing for themselves, even though the charges are very attractive," Mr Murphy says.

In Britain, the introduction of the low-cost stakeholder pensions - their PRSA equivalent - led to a "halo effect", with insurance companies cutting commissions on personal pensions and company schemes in order to prevent people from switching out of them and into stakeholder pensions.

That's less likely to happen here, Mr Murphy says, because upfront charges are common here and, as a result, it makes sense to stick with the pension scheme you are currently in.

The ability to stop and start contributions can also rebound on the PRSA holder, according to Mr Paul Kenny, head of research at consultants Mercer.

"People may decide that Christmas is coming up and they can't afford a PRSA at the moment. Then when the credit card is cleared in February, they may start contributions again."

"When summer comes up, they might say 'I can't be paying for a PRSA and going on holidays to Tenerife'."

The end result is a pension that might not be adequate enough to keep up the standard of living the PRSA holder was enjoying when he or she was younger.

Newer defined-contribution company schemes are prompting concerns about how adequate pensions will be in the future.

Under these types of schemes, the size of the pension depends on how much is contributed to the fund, which is then exposed to variations in the stock market.

Research shows that employers will contribute almost twice as much to the older defined-benefit schemes as they will to defined-contribution schemes.

Employers with no company scheme at the moment or who exclude certain people from the company scheme will have to give employees access to a standard PRSA.

This means they must select at least one PRSA product, make deductions from payroll at the employees' request and give employees reasonable time off for financial advice. But they don't actually have to pay anything towards it.

"The big issue with PRSAs is: will employers just comply with the letter of the law or use the introduction of PRSAs to review their pension policies and actually make contributions?" asks Mr Murphy.

The experience in Britain with stakeholder pensions has shown that only one in 10 employers make contributions, according to a recent report.

The first half of next year will see a race by PRSA providers to sign up employers to their products and target as many customers as possible at once.

Laptops and group presentations are likely to be commonplace as worksite marketing gets under way. Just because employers give employees information and access to a PRSA doesn't mean that employees will go ahead and sign the contract with the life assurance company.

In Britain, nine out of 10 stakeholder pension schemes arranged by employers are "empty boxes" - they have no members at all.

Employers' attitudes could make or break PRSAs. "If you look at studies done in other countries of take-up ratios, if the employer is contributing you get a higher take-up rate," says Mr Murphy. A review of PRSAs will take place in 2006. If the number of workers with a pension has not increased by then, the Government may examine the idea of compulsory pensions.

"In the event of the cover not being as it should be, we would look at the mandatory approach," the Minister for Social, Community and Family Affairs, Mr Ahern, said in a Dáil debate in March. Compulsory pensions set a minimum contribution that employers must make on behalf of their employees, usually at a low level. This brings the fear that this will drive more generous contributions down, with the minimum becoming the norm.

This and employers' gradual retreat from defined-benefit schemes could lead to a generation of pensions that are far off the one-half to two-thirds of final salary benefit that many of today's pensioners enjoy. "A lot done, more to do, as they say in political circles," Mr John Feely, president of the Irish Association of Pension Funds (IAPF), told a conference on PRSAs in October.

The IAPF argues that pensions legislation needs to be simplified, differing tax regimes brought in line and the transfer of savings from Special Savings Incentive Accounts to PRSAs on maturity promoted.