PRSA holders will receive investment updates every six months indicating how their fund is performing.

Laura Slattery

On Monday, six life companies were approved to sell Personal Retirement Savings Accounts (PRSAs), the long-awaited new form of portable pension pitched at people who are not members of occupational schemes.

If successful, PRSAs will also expose greater numbers of people to the vagaries of the stock markets, as pension funds are heavy investors in equities.

Unfortunately, recent times have seen more downs than ups in the value of Irish pension funds. The average managed pension fund lost 18.9 per cent of its value in 2002 and is down almost 8 per cent over the past three years.

"It's probably the most difficult time in pensions history," says Mr John Feely, chairman of the Irish Association of Pension Funds (IAPF).

However, the IAPF has asked its members to keep the faith with equities, rather than make the move to more cautious investments like bonds, which could prove costly in the long term.

"We're not saying forget about everything, but we know that pension funds are a long-term investment and we know that equities are a long-term investment. That's why historically the two have gone hand-in-hand," says Mr Feely.

Losses over the past three years affect people in defined-contribution pension schemes coming close to retirement who didn't move their fund to safer investments. People nearing retirement really shouldn't have 70 per cent of their pension fund invested in equities, Mr Feely says.

"The reality is there is probably some who stayed invested in equities and have seen their pension entitlements reduce close to retirement. That's a difficult situation they're in and there's not a lot of comfort you can give to that."

Poor fund performance, together with concerns about the stringency of the minimum funding standard and the impending introduction of the FRS 17 accounting standard, which shows a company's pension liabilities in harsher light, could lead to further closures of defined-benefit pension schemes.

These schemes guarantee a pension based on final salary rather than stock market returns, so are more attractive to employees.

For younger people who are part of defined-contribution schemes, it's not all bad news. The first thing to remember is that pensions are not just a long-term investment, they're the longest-term financial commitment anyone can make.

A worker who starts contributing to their pension at the age of 25 will have 40 years of tax relief and projected benefit statements to get through by the time they reach 65 and it all starts to make sense.

The IAPF has published an update on the investment climate for pensions, highlighting the fact that over the 10 years ending December 2002, the average pension fund has had returns of 10.9 per cent per annum, thanks to stellar returns of 21 per cent per annum between 1995 and 1999.

For the 10-year period, the real return, over and above inflation, was 7.9 per cent per annum.

However, people in their 20s and early 30s won't have enjoyed 10 years of returns, Mr John McGovern, a pensions consultant at Becketts Employee Benefits Consultants, points out. The growth of the 1990s had evaporated by the time many joined a pension scheme.

Mr McGovern believes the past three years will have had a major impact on the benefits of people in defined-contribution schemes. He expects returns in the next few years won't exceed high single digits, falling well below the double digits of the 1990s.

"It will take a period of five years before we get back to where we were," he says.

But because people were paying into their pension on a monthly basis, not all of their contributions will have felt the full effect of the market's fall, he notes.

It is also better that these blips in pension investment happen now rather than closer to retirement, he says, and most defined-contribution schemes have been set up relatively recently. Mr McGovern says he hasn't set up a defined-benefit scheme in more than 10 years.

Ms Anne Maher, chief executive of the Pensions Board, which is overseeing the approval and regulation of PRSAs, says the current market environment is giving the introduction of the new pension product "a bad feel".

But she reminds people intending to buy a PRSA that now they will be getting in close to the bottom of the market and buying units at low prices.

"It's the ideal time to get in," Ms Maher says.

The six companies that received approval on Monday will no doubt stress this point in their marketing drive. Ark Life starts advertising its standard PRSA today, while the other five companies - New Ireland, Irish Life, Hibernian Life & Pensions, Canada Life and Eagle Star - are all expected to start introducing their products over the next few weeks.

Most could be happy to stick to the default investment strategy under standard PRSAs rather than pick and choose from the wider variety of fund choices available under the more expensive non-standard PRSAs.

Mr McGovern believes making a start on saving for retirement and trying to get employers to contribute will be the main priorities for people taking out the new pension, rather than the array of investment choices and performance statistics.