Pension warnings finally affect contributions

Strongly worded warnings about the prospect of an impoverished retirement are finally having some effect with a rise in the level of payments into defined contribution schemes according to the latest Mercer Pension Fund Investment Survey.

The 2006 report says more than 30 per cent of respondents to its annual survey are now paying in excess of 15 per cent to such schemes, although the average is still closer to 10 per cent - a level that will almost certainly not provide pension income in line with individuals' expectations.

"Ongoing education and communication regarding pensions adequacy and the provision of a sufficient standard of living in retirement seem to have been effective although this challenge still remains," writes Tom Geraghty, head of Mercer Investment Consulting. Defined contribution schemes deliver a pension based on the market performance of contributions paid into the plan. The picture on defined benefit (DB) pension schemes is still grim, according to the report, with 68 per cent of such schemes not currently "fully-funded" under current strict regulation despite strong equity market performance in the past three years.

Increased pressure to meet solvency standards and worries about the impact of pension deficits on company balance sheets has seen trustees and plan sponsors adopt a shorter-term view on investment decisions - a move that runs counter to the design of such schemes which pay a guaranteed income in retirement based on length of service.

The pressure on DB schemes has hit the headlines recently at both Independent News & Media and Bank of Ireland. The issue saw the bank and the Irish Bank Officials' Association in the Labour Court yesterday.

The annual survey of pension fund trends shows funds adopting a lower risk profile with the portion of funds invested in equities falling to 69 per cent from 75 per cent three years ago. and a dominant view among trustees that fund managers "hug" benchmarks, undermining the concept of active management.

More money is moving into more conservative bond investments as a trend to liability-driven investment strategies gathers steam.

However, Irish funds continue to overinvest in the Irish stock market. Despite the fact that Ireland accounts for less than 1 per cent of global equity markets, almost 70 per cent of Irish funds have more than 10 per cent of their assets invested here.

There are moves to diversify, with 30 per cent of respondents looking to reduce Irish holdings despite the market's outperformance in recent years, and a growth in the use of specialist managers. There are also some signs of a greater acceptance of a role for alternative investments in asset management strategy.