Rising annuity costs threaten the pensions of more than 400,000 workers, industry leaders have warned the Government.

The Irish Association of Pension Funds (IAPF) says the obligation on occupational pension schemes to buy annuities is forcing many companies to reconsider the benefits they offer employees.

It is calling on the Government to introduce more flexibility for pensioners in drawing down their pensions.

It also wants the Government to introduce a State-backed annuities scheme.

Annuities are policies bought through insurance companies that guarantee to pay a set monthly income over the remainder of a person's life.

"Annuities are a secure method of providing retirement income but that level of security comes at a really high price, particularly with current market conditions," said IAPF vice-chairman Patrick Burke.

"We estimate that annuity prices in the open market are up to 30 per cent greater than the economic cost of providing the pension payments which they underwrite," the lobby group said over the weekend.

"Annuities do have a place in the range of options that should be present in a properly developed pensions regime but, in Ireland, open market annuities are a regulatory requirement - not an option - for almost all and they set an unreasonable benchmark for the funding standard imposed by the Pensions Act," said Mr Burke.

Increasing longevity, higher annuity costs and volatile investment performance have seen a significant proportion of occupational pension schemes struggle to meet tighter funding standards in recent years.

"The current funding standard is unrealistic and is operating against the interests of pension scheme members it is supposed to protect," says IAPF chairman Joe Byrne.

The IAPF argues that the introduction of a State-backed annuities scheme would effectively ease the funding standard, reducing the cost to employers, without undermining scheme members' rights.

It envisages the scheme being called on only in the event of occupational schemes being involuntarily wound up in the event of company insolvency.

Fund managers say that there are now a limited number of insurance companies offering annuities, reducing competition.

In addition, the IAPF says that, for both commercial and regulatory reasons, those companies that do offer such products are taking conservative investment decisions and making conservative mortality assumptions when determining their rates.

"This is forcing many pension schemes to close down or strip down with reduced pension benefits for tens of thousands of workers," said Mr Burke.

The warning comes ahead of the annual IAPF benefits conference which will be addressed by both European Commissioner Charlie McCreevy and the Minister for Social and Family Affairs Seamus Brennan, who has instigated a review of national pension policy.