Experts are warning that people should be contributing 15 to 20 per cent of their salary from the day they start work, or they'll end up having to work until they 're 70 or 75, writes Laura Slattery

A pensions time bomb is set to explode over the next few decades. The way to stop it detonating? Persuade people to save more for their retirement from an early age, according to leading pensions and benefits consultants at Watson Wyatt.

Mr Alan Whalley, managing partner of the international human resources consultants, warns that the drift from defined-benefit to defined-contribution pension schemes means more and more people will be forced either to continue working past the age of 65 or rely on whatever limited form of State pension will be available.

"There's a big time bomb here. People should be contributing 15 to 20 per cent of their salary from the day they start work, or they'll end up having to work until they're 70 or 75," he says.

That's if they can find work.

Mr Kevin Spring, the partner heading Watson Wyatt's Irish offices, says that in 20 or 30 years' time we could be looking back on a golden age of pensions, an era where the majority of occupational pension schemes provided as much as two-thirds of final salary to long-serving employees.

Defined-benefit pensions guarantee employees a proportion of their final salary, typically between one-half and two-thirds, with members paying around 5 per cent of their salary into the scheme.

But, under defined-contribution schemes, the size of the pension will depend on how much employees and employers put into the pot, and how good or bad the investment return on that sum is by the time they retire.

One in eight defined-benefit pension schemes in the Republic is closed to new members, according to a survey published last week by British-based researchers at the Pension Fund Partnership. Crucially, the survey also showed that employers contribute almost twice as much to defined-benefit plans as they do to defined-contribution schemes.

"Who's going to make the gap up? The State isn't," says Mr Whalley. "There will be a lot of employees who will be very disgruntled," he predicts.

Over a quarter of companies surveyed by the Pension Partnership Fund said it was likely or very likely that they would close their defined-benefit plan to new members in the next year. The Irish Association of Pension Funds believes the amount that actually will be closed will prove much less dramatic, due to the time-consuming negotiations and planning required, but Mr Whalley points to the British experience, where the shift from defined-benefit to defined-contribution pensions gained strong momentum in a short time.

"I think two years ago people doubted it would happen in the UK, but the pressure on employers to keep their cost base down is intense," he says. "Around half of the defined-benefit schemes of the FTSE 350 companies are now closed to new members," he points out.

In Britain, Watson Wyatt has a substantial share of the consultancy market, advising half of the top 100 corporate pension funds. In the Republic, the company's clients include Bank of Ireland and Guinness.

Although some companies in Britain have frozen contributions to their defined-contribution plans, most are simply closing them to new employees.

"You could be sitting next to someone and doing the same job as them but, because you joined a year later, you won't have the same guarantee of 1/60th of final salary for every year you work," says Mr Spring. "We're going to have a two-tier society for a very long time."

There already is, unsurprisingly, a generation gap. For younger people, the word pension leads to automatic brain switch-off so often that employers never usually find lack of retirement provision a barrier to recruitment.

"If I'm in my 20s, it's not the kind of word I want to engage in; it has a dusty image," says Mr Spring. What's the point of even thinking about retiring when you haven't found the right job or a place to live yet? Younger people no longer want a job where they can do 40 years' service and get a gold watch at the end, nor are they excited about safety nets they won't need to use for decades.

And pensions are not the only pull on people's pockets, nor are they only way to invest for the future. "With property, you can always downsize," notes Mr Spring.

But there is a "snowball effect" with pensions: early contributions are the most valuable over the term of the investment.

"If I let the car or the house or the holiday take priority at a time when contributions could really grow, I've got a lot of running to do to catch up."

A defined-contribution pension is of course better than no pension, says Mr Whalley. One in two workers in the Republic has no occupational or personal pension, according to pensions data compiled by the Central Statistics Office and published last week.

Next year, flexible, low-cost pensions called personal retirement savings accounts (PRSAs) will be introduced in order to boost pensions coverage.

Up to the age of 30, tax relief will be allowed on PRSA contributions of up to 15 per cent of earnings. From age 30 to 40, this increases to 25 per cent and anyone over the age of 40 can contribute 30 per cent tax-free. Account-holders are free to stop and start contributions at any time without incurring charges.

Employers who do not offer an occupational pension scheme will have to offer employees access to a standard PRSA. This means the employer must enter into a contract with at least one PRSA provider, notify employees of their right to contribute to a standard PRSA, allow PRSA providers reasonable access to employees to discuss PRSA contracts and make deductions from payroll at the employees' request.

But although they may choose to do so, employers are not obliged to make any contributions to the PRSA.

So it is likely that PRSAs will shift the responsibility for retirement provision even further onto the employee.

As the investment risk is passed from employers' balance sheets onto the shoulders of individual employees, Mr Whalley believes it is the responsibility of human resources directors to educate staff on how to invest wisely.

"Left on their own, people will invest cautiously in building societies instead of equity-based investments where they can get a better long-term return," he says.

The Pensions Board has recommended that a national pensions' awareness campaign should run in conjunction with the introduction of PRSAs next year. It's intended to prompt everybody to consider their pension position.

Employers should also practise "enlightened paternalism", Mr Whalley says, and make sure everyone understands how important it is, when it comes to pensions, to pay early and often.