Pensions: what should you bear in mind?

Providing for retirement has become a headline issue in the 1990s, not least because of fears worldwide that countries will find it more difficult to fund state pensions.

In Ireland, a study last year revealed that only 52 per cent of employees were members of occupational schemes - a fall of 2 per cent since 1985. Of more concern was the revelation that 73 per cent of self-employed people have made no provision for retirement - a figure that rises to 89 per cent among selfemployed women.

While pension coverage in large indigenous companies and multinationals is above the 70 per cent mark, it is of concern that coverage within small enterprises is only 16 per cent. Part-time and contract workers are even less well prepared, at just 10 per cent. In the private sector, only 38 per cent of workers are members of schemes and 46 per cent of the labour force is in one of the more than 50,000 pension schemes, according to the Pensions Board.

Defined Benefit versus Defined Contribution.

Until recently, the use of defined benefit schemes was almost universal. In plain terms, these schemes let the contributor know what the yield will be at retirement. Traditionally this has been a maximum forty-sixtieths, or two-thirds of final salary based on 40 years service, or onesixtieth of salary for each year of service. In some cases, the figure was forty-eightieths or half of final salary on the same terms.

For the prospective pensioner such a scheme has the advantage of allowing them to determine precisely what money will be available during retirement, regardless of contribution. Within occupational schemes, employee contributions are normally fixed, with employers' payments amounting to whatever is required to ensure the promised level of cover is provided. Under recent legislation, employers must show each year that they are properly funding the scheme. In recent years, and particularly since the introduction of the 1990 Pensions Act which now provides the basic legislative framework for the industry, defined contribution schemes have become more popular, especially with employers. Under defined contribution plans, the payments of both employee and employer are fixed.

The level of the eventual pension depends on the performance of a fund in to which these contributions are made. These funds invest in a mixture of shares, government stocks, property, cash and commercial paper both at home and abroad.

The advantage for employers in defined contribution schemes is that they can determine precisely what their pension contribution outlay will be.

What to look out for

Some pension plans trim back payments to take account of the social welfare pension although this is not required by the Revenue Commissioners. Any pension taken out since 1991 must be transferrable between jobs if the pension fund member has five years of qualifying service, at least two of which must be after the new Act came into force.

Most pensions will make some provision for inflation after retirement; always check the specific provisions. If there are known, consultant the trustees of your pension fund.

There is no obligation for pension provisions to be made for spouses/partners if the event of the death of the pension fund member in retirement.

In the case of personal pensions, the structure of fees and charges should be clarified prior to joining, as should the possibility of reducing or, indeed, suspending contributions for a period.

Finally, never forget that the cost of planning for retirement grows enormously as you age. It is never too early to start putting some money into a pension fund, upping the contributions as you are able.

Send your queries to Q&A, Business This Week, 10-15 D'Olier St, Dublin 2.