Warning to pension contributors

MEMBERS of defined contribution schemes could be sitting on a potential pensions timebomb and are largely unaware of it, a conference heard yesterday.

Raymond McKenna of KPMG People Strategies said the average defined contribution pensions member needs significantly to increase contributions if they are to secure an adequate income in retirement.

“Figures show the average contribution by employees and employers to a defined contribution scheme is about 10% of income, Mr McKenna told the Irish Association of Pension Funds conference yesterday.

“IAPF research finds that this should be more like 15%-25% of income depending on age and individual circumstances.”

The association estimated there are approximately 237,000 Irish people with defined contribution pension schemes.

This is an occupational pension scheme in which employer and the members contribute to the scheme at an agreed fixed rate.

In these schemes, the member’s benefits on retirement will depend on the total amount contributed to the fund and the investment returns earned.

He warned that defined contribution members needed to be more aware of the fact that retirement income was also threatened by risks in terms of investment market performance and interest rates.

“Even if they get the contribution levels right they have got to be aware of the risk caused by inappropriate investment strategy, volatile equity markets and a low interest rate environment.”

He said many people were still unaware of the fact that low interest rates increased the cost of an annuity required to buy a pension for life. He called for greater education in relation to the risk of inappropriate levels of contributions, investment strategy and low interest rates.

Mr Patrick Burke of IPT Pension Trustees and chairman of the IAPF Trustee Forum Steering Group issued a stark warning about the threats to the future of member benefits caused by short term statutory funding requirements and accounting standards.

“Trustees of a large number of defined benefit pension schemes in Ireland could currently find their schemes technically insolvent on the statutory test and incapable of meeting the legislative funding requirements.

“The risk is that employers may not be able to contribute at the rates necessary to satisfy current pensions legislation and, as a consequence, the level of benefits that are being provided for employees may come under threat.

"It would be ironic if the steps taken by the regulator to protect the interests of scheme members had the opposite effect and for many schemes this may well be the case.”