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'Worrying' pension outlook

Members of defined contribution (DC) pension schemes could be missing out on significant amounts of retirement income, according to a new report.

Hewitt’s 2008 defined contribution scheme survey, which covers more than 100 DC schemes with in excess of 30,000 members, shows that many are not as efficiently run as they could be.

The report says that many are failing to introduce simple mechanisms that could considerably increase member retirement income.

DC schemes – where the pension is determined by the money invested and investment performance – are increasingly becoming the norm for workers and there is concern that many will see their pension income fall short of expectations.

The survey found that a significant number of schemes do not use features such as matched contributions, a contribution structure which automatically escalates with age or active investment management. Combined, these features could increase future retirement income by up to 45 percent.

Hewitt put the benefit of active management at 10 per cent of additional return. It said a 20 per cent increase in pension fund could be achieved through automatic escalation of contributions by the employee and 15 per cent uplift could be gained by matched contribution, although this last solution would incur increased cost for employers.

The survey also showed that the average employer contribution into a pension scheme is 6 per cent of salary with a further 4 per cent coming form the employee – a figure that has changed little in recent years and is described by Hewitt as “worrying”.

Time to recoup investment losses

Pensions have taken a beating in the past year but some managers are arguing that now is the time for investors to poke a toe in the water.

Bank of Ireland Life this week urged pension savers to review their pension fund. Stephen Byrne, pensions manager, Bank of Ireland Life, said: "Pension savers are understandably upset that the average pension managed fund has lost about one-third in value over the last year, and many don't know what to do. For those with 10 years or more to go to retirement, the good news is that you can actively manage your way through the current financial storm.

"If you increase your monthly pension payments now, you could recoup losses to date and remain on track to meet your desired income at retirement."

The bank gives the example of a person who started their pension 10 years ago at age 30 earning €30,000, and whose pension fund has suffered an average loss of about a third of its value. The bank says they can top-up their pension by €112 a month. "After tax relief, this translates to a net cost of just €66 per month, a small outlay to position your pension fund to produce an estimated income at retirement of two-thirds final salary, less the State pension," says Mr Byrne