A new survey by Mercer investment consultants warned today that contributions to defined pension contribution schemes are rising but remain inadequate to cover the cost of retirement.
Members of defined contribution pension plans receive an average contribution rate of 10% compiled of an employer's contribution of 5.9% and the balance made up by the employee, the survey finds.
However the level of funding varies across industries and defined contribution schemes offer no guaranteed income at retirement.
Mr Ken Mortimer of Mercers warned that many low-paid workers may face a large shortfall in their income until they become eligible for the State pension at 65.
For higher paid workers an average contribution of 10% is likely to be less than half of what is needed to provide a reasonable level of replacement income after retirement, especially if the employee wants to retire before 65.
Mr Mortimer said many employees who are members DC pension plans are unaware of the level of income they are likely to be provided with after retirement. He said that in a DC plan, a member cannot estimate the likely level of pension income without access to a projection tool or a statement showing their expected level of income after retirement.
In a defined contribution pension plan, pensions in retirement depend mainly on the level of contributions paid, the rate of investment return earned and the price of buying an annuity/pension with an insurance company at retirement.
This contrasts with a defined benefit scheme where the member's pension on normal retirement is specified usually in terms of their salary and service, giving the member more certainty regarding the level of their income during retirement
As a result of legislation introduced in 2003, employers must offer employees a PRSA from the date they join the company, unless they are given access to a company pension plan within 6 months of joining.
However, many employers have changed the rules of their schemes so that employees are eligible within 6 months of joining, in order to avoid having to offer PRSAs.
Mercer's survey shows that only 9% of schemes require more than 6 months service before joining. In addition, legislation requiring employers to provide equal terms to fixed-term employees has resulted in many employers changing the rules of their scheme to allow fixed-term employees to join.
The survey includes data on 72 defined contribution pension plans and only includes plans that have more than 50 members.
The Irish Association of Investment Managers (IAIM) reacted strongly to the report by Mercer and said that Irish pension funds have gained substantially from maintaining a reasonable level of exposure to Irish equities and thus to the fastest growing economy in the OECD, despite consultants' advice that they reduce Irish equity weightings to a very low level.
Chairman Ruth O'Briain said that Irish investment managers and pension funds have a balancing act to make in relation to the level of their holdings in Irish equities.
She said since the advent of the Euro, Irish pension funds have reduced their exposure to the Irish market in favour of the Eurozone. The continuing challenge for investment managers and pension funds is to weigh up the acceptable and prudentially sound level of exposure to any particular market and the Irish market is no exception.