Many of those on the verge of retirement are crying out for a return to theglory days when interest rates were comfortably into double digits, writesLaura Slattery.

Mortgage holders basking in the current climate of low interest rates may be a little shocked to know there is a large group of people out there who are just crying out for a return to the glory days when interest rates were comfortably into double digits.

This is because the pensions of about one-third of the people in occupational pension schemes in the Republic are linked to the interest rates prevailing at the time they retire.

These individuals - or, more normally, the trustees of their fund - use their pension fund to buy an annuity that guarantees an income for life in exchange for the lump sum payment.

The problem is the retirement income a person can get by buying an annuity has fallen dramatically since the 1980s as interest rates fell.

A benchmark annuity rate for a single male retiring at 65 has fallen from 10 per cent to 7.5 per cent.

The annuity rate is the annual income from the annuity expressed as a percentage of the lump sum used to buy it.

Annuity rates depend on two things: the long-term yields on gilts - which have in the past moved up and down in tandem with base interest rates - and the fact that we are all living longer.

The good news for workers about to retire is that life expectancy for people aged 65 has improved.

The bad news for those in defined-contribution - or money purchase - type pension schemes is that insurance company actuaries have kept a close professional eye on improving mortality statistics.

People who are about to retire in a few years hold out too much hope that annuity rates will improve, according to Mr Philip Shier of pensions consultants Hewitt & Becketts.

Relatively modest rises in interest rates, such as the 0.25 percentage point increase in the European Central Bank (ECB) rate forecast for later this year - will not necessarily result in higher annuity rates.

Continuously improving mortality statistics will prevent annuity rates from ever going back up to their previous highs.

Guaranteeing fixed pensions for life can also have a big effect on insurance companies' reserves, Mr Shier notes.

"Whether the insurance companies feel that they have a significant margin on their annuities to pass on any increases to customers is the $64,000 question," he says.

"One or two companies deliberately stay out of the market from time to time by offering non-competitive terms."

For this reason, it is vital to shop around for annuities, rather than accepting the first quote you receive.

Most pension arrangements allow for an "open market option", which means that people do not have to stick with the company in which they have been investing their pension contributions.

Irish Life is the biggest provider of annuities in Ireland. Standard Life, New Ireland, Friends First and Hibernian Life & Pensions are also in the market.

Mercer Human Resource Consulting has provided figures showing the best and worst compulsory purchase single life annuity rates from five providers in the Irish market.

They show that a man retiring at the age of 65 with €50,000 in a pension fund can lose up to €238 a year by not shopping around when buying an annuity. His monthly pension cheque would be €19.80 lower than what it could have been had he found the most competitive quote.

A woman in the same scenario could save even more.

The difference between the cheapest and most expensive annuities on offer for a female aged 65 was €412. If she bought the most competitive quote, her pension could be boosted by €34.30 a month.

Service will also be taken into consideration when an individual, broker or trustee chooses an annuity, says Ms Martina Tighe, retirement consultant at Mercer.

"They will want to know if the pension will be paid on time," she said.

Annuities are not the only reason why annuity pensions are likely to be smaller in the future, according to Mr Owen Morton of Moneywise Financial Planning.

Actuaries have also been forced to lower their expectations of investment returns from 8 per cent to 6 per cent per annum.

This means the lump sum available to buy the annuity will be smaller. The accompanying table shows how much a member of a defined-contribution pension scheme, with an existing fund value of €100,000 at aged 45, would have to contribute to compensate for both falling annuity rates and lower fund growth in order to get the same pension he or she would have got under the old regime of better investment returns. It is unlikely that many employees could afford to put the suggested 17.4 per cent of their salary into their main pension fund. In a more realistic situation, the employer and employee input would be around 7.5 per cent of salary each.

The effect of lower annuity rates and investment growth means an employee in this scenario would receive a final pension worth just 44.7 per cent of his/her final salary, compared to the traditional two-thirds target.

But the total 15 per cent contribution still represents a commitment on the part of both employee and employer to solid pension funding, Mr Morton notes.

The main driver for this pensions time-bomb is that employers are "hugely undercutting" the percentage of salaries they put in, he believes, with a total contribution of 10 per cent now deemed generous.

Reduced annuity yields and investment expectations combined only make up half of the problem, but are being blamed the most, according to Mr Morton. "People are making excuses."

Trustees of defined-benefit schemes - where employees are guaranteed a pension based on a proportion of their final salary - do not usually buy annuities.

But that doesn't mean the two out of every three pension scheme members who belong to this generally superior type of pension scheme are protected from the effect of falling interest rates.

Minimum funding rules require employers to put enough money into these pension schemes so that if the company went bankrupt the scheme would automatically have enough assets to pay all of the promised pensions.

"To do that, they would have to buy annuities," says Mr Shier.

As a result, employees of companies whose pension scheme is failing the minimum funding standard may be asked to increase the percentage of their salary that they normally contribute to their pension.