Many consumers are not aware that they may need to significantly increase contributions to their scheme, writes Laura Slattery

Complacency may be the big danger for up to one in three pension scheme members who have little way of knowing what their income will be in retirement, a Dublin conference heard this week.

Members of defined-contribution pension schemes are often not given estimates of their projected pension and can find it hard to tell if they are on target for a secure retirement or about to join the ranks of the "retiring poor".

This week's Irish Association of Pensions Funds (IAPF) annual conference at Dublin Castle saw a call for legislation to protect the 250,000 employees who are members of defined-contribution schemes and have none of the final-salary guarantees afforded to defined-benefit members.

Derek McNamee of Heissmann Consultants said it was surprising that an estimate of the projected pension was not currently required under the legislation for defined-contribution annual statements, as they are for Personal Retirement Savings Accounts (PRSAs).

"Many annual statements are of limited value as they only state the contributions paid and the current value, not the projected pension on retirement, which is what matters," said McNamee.

"As a result, consumers are not aware that they may need to significantly increase their contributions to ensure an adequate pension."

The adequacy of current rates of contributions to these pension schemes has come into question in recent years as a result of longer life expectancy and lower bond yields.

In a defined-contribution pension plan, the retirement income depends on the levels of contributions paid, the rate of investment returns earned and the price of buying an annuity from an insurance company at retirement.

Annuity rates have steadily fallen over the last couple of decades meaning retiring workers get a much lower monthly income in return for their pension funds.

Exacerbating the problem is the fact that defined-contribution schemes are more popular now than ever. For employers, they are altogether less costly and less risky than the defined-benefit model.

According to a new Mercer survey of 72 pension schemes, the average contribution by employers to defined-contribution schemes is 5.9 per cent. The average contribution by members is 4.1 per cent.

These contribution rates have gone up over the past two years, but the combined 10 per cent contribution rate is still likely to be less than half of what higher paid employees need to contribute in order to provide a reasonable level of replacement income in retirement.

Ken Mortimer, a senior consultant at Mercer, said it was encouraging employers to make projection tools or statements available to employees well in advance of their retirement, so that they can work out the level of additional voluntary contributions (AVCs) they need to make in order to reach their target pension.

"Making such a tool available is likely to give employees a more realistic picture of when they can retire and avoids unpleasant shocks for employees at retirement," Mortimer said.

The IAPF, Mercer and Pensions Board believe that too many people are feeling happily prudent simply by being a member of a pension scheme and are not paying attention to the finer details of the scheme.

The Pensions Board's pensions calculator allows people to estimate the amount of money, net of tax, that they would need to contribute, based on their age, gender and current salary, in order to get what they want.

Like all projection tools, the figures are based on certain assumptions, for example that the investment return will be 5 per cent per annum and that the user's salary will increase at a rate of 3 per cent per year, but the numbers the calculator throws up are stark enough.

A male aged 25 with a salary of €40,000 should start off contributing at least €283 per month if he wants to stay on course for a pension that is equivalent to two-thirds of his final salary.

Thanks to longer life expectancy, a 25-year-old female with the same salary and target pension should be contributing a massive €394.

The recommended contribution rates increase as the workers get older, and those who leave it late to join a pension scheme will have to plough every spare cent they have into AVCs to get anywhere close to an adequate pension.