People are not doing nearly enough to provide for themselves when they retire, writes Dominic Coyle

Ireland is sleepwalking towards an impoverished retirement. Everyone knows they need to save now to provide a pension income but large numbers aren't doing so and, even those who are, are putting nothing like enough aside.

The most optimistic figures show that only around 52 per cent of the working age population has private pension cover over and above that provided by the State.

That means that a considerable proportion of the working population is facing the prospect of a dramatic fall in their income when they retire and find themselves dependent on the State pension.

The Pensions Board is hoping to jolt people into action during National Pensions Action Week, which begins today.

In recent years, the board, which regulates the pensions industry, has been running pensions awareness programmes in an effort to raise the percentage of people between the ages of 30 and 69 with pension coverage from 50 per cent to 70 per cent.

The changing nature of occupational pensions in Ireland has contributed to misconceptions about retirement provision. Until fairly recently occupational pensions tended to follow the defined benefit model.

Retirement income was determined by the time worked for an employer rather than the mount paid into the fund.

The rising cost to employers of funding defined benefit, or final salary schemes, has seen the rapid growth of defined contribution occupational schemes.

These are the reality for most modern workers, but the pension they will provide is determined by the contributions made and the investment performance.

There lies the crux. Leaving aside the 48 per cent of people who seem to have no occupational provision whatsoever, those with defined contribution schemes are, in general, paying nowhere near enough in contributions to provide the sort of retirement income they would expect.

A survey of defined contribution pension plans by consultants Mercer recently found that, on average, employees contribute just 4.1 per cent of their salary, with employers putting in an additional 5.9 per cent.

On current projections, that combined contribution of 10 per cent would not even be enough to provide a half pension for an employee on a salary of €40,000 at the age of 30 - the age at which the Pensions Board suggests people should start taking action to provide for their retirement.

A pensions calculator provided by the Pensions Board on its website www.pensionsboard.ie shows that providing a half pension on those terms would require contributions of 11 per cent of salary.

If you wait until you are 40, the figure rises to 18 per cent of salary, or €345 a month. Assuming pay continues to rise as your career progresses, paying for a pension also rises.

Social affairs Minister Seamus Brennan heard recently that €6.6 billion needed to be invested in occupational pensions each year if people were to provide adequately for themselves in retirement.

In pensions terms, adequacy is seen as providing a pension equal to half of working earnings while the gold standard remains the provision of a pension that will provide replacement income of two-thirds of final salary.

The Pensions Board told the Minister that three-quarters of private sector workers do not have sufficient pension savings by the adequacy measure.

The situation has been exacerbated by the poor early take-up of Personal Retirement Savings Accounts (PRSAs), the initiative the Government had hoped would substantially raise pensions coverage - particularly among the lower paid and people who were outside the workforce temporarily or otherwise, such as stay at home mothers, or people between jobs.Pensions Board chief executive Anne Maher said the regulator is very concerned at the number of "shell" PRSAs around - accounts that have been opened but which are receiving no contributions.

According to the latest figures, only 22,162 employees at more than 71,000 employers providing a PRSA option have actually opened an account, with just under 7,250 people putting any money into them.

"It is not enough to just notify employees that the company has a PRSA provider if they so wish," she said.

"We would encourage employers to take the initiative during Pensions Action Week to make these shell PRSA schemes active."

Industry representatives see the PRSA experience as confirming their view that the products were unnecessarily complex and not an attractive enough prospect for assurance companies.

"The fact remains that pensions are sold rather than bought," said Hibernian head of life and pensions Martin O'Hora.

However, he sees the overall pension provision figures as an opportunity for the industry. He also notes that the special savings incentive scheme has introduced regular medium-term savings to a large portion of the Irish workforce.

The Pension Board has been operating a "carrot and stick" approach. While placing the emphasis in recent years on encouragement, Ms Maher has warned more than once that, should this not work, one option would be the introduction of mandatory pension provision.

Mandatory pensions are just one area of pension coverage currently being discussed. The single greatest incentive to invest in pensions - tax relief at the top rate of tax - is also coming under scrutiny.

The Economic and Social Research Institute (ESRI) last week stated that the cost to the Government of provided tax relief on contributions to occupational pension schemes was €1.5 billion in 2000/01.

That was just below the €1.6 billion total cost to the Government of funding the State pension system.

"The State is, therefore, providing far more support for the average member of an occupational or personal pension scheme than for the average member of the PRSI contributory old age pension scheme because the coverage of the private system is only about half that of the public system," wrote Gerard Hughes and Dorothy Watson, authors of the ESRI report.

It has called for an official review of the value for money being received by the State from its investment in the private pension system.

This view runs counter to the broad thrust of the pensions industry which has, if anything, been calling for an extension of tax relief on pensions. In particular, there have been efforts to encourage the Government to increase the tax relief available to lower paid workers on pension contributions.

At present, they receive relief at the lower 20 per cent rate and the evidence suggests this is not enough to persuade them to divert money from other areas of spending into pensions.

Interestingly, the think-tank's research also showed that only a third of pensioners were benefiting from income drawn on an occupational or personal pension. And even then, that money accounted for less than a quarter of average income during retirement.

The message from the Pensions Board this week is that the time for talk is over. The slogan for National Pensions Action Week sums up their argument: "Face Up to Your Financial Future".