Most defined benefit pension schemes will not recover as the value of equity markets increase because of new regulations that force pension fund managers to abandon equities for bonds.

As a result, the increasing costs of these pension schemes will force many firms to wind up defined benefit pension schemes or close them to new members, according to an article in the new edition of Irish Banking Review.

Mr Shane Whelan, a member of the Department of Statistics at UCD, said a combination of factors meant Ireland had now reached a watershed in the provision of occupational pensions.

Three consecutive years of unusually poor returns from equity markets has put a focus on the financial risks borne by employers in promising a target pension for employees.

The poor equity returns are bearable, but when combined with a resilient bond market, increased life expectancy and a rapid salary increase in the Republic, it produces a gloomy picture, he says.

Of particular concern are the changes to the regulation of pensions introduced in the Pensions (Amendment Act) 2002, which require defined benefit pensions to demonstrate that the assets of the scheme are sufficient at all times to meet the scheme's liabilities, says Mr Whelan.

This encourages a move of Irish pension fund assets away from equities towards bonds, which should increase the long-term cost of operating defined benefit plans because bonds typically lag equities in the long run.

This in turn will have consequences for defined benefit pensions, which guarantee an employee a fixed sum when they retire regardless of the performance of the entire pension fund.

The decision to establish such schemes, or to keep them open to new employees, is taken by employers, says Mr Whelan. "We can expect the increased cost burden (and its lack of transparency) to discourage new defined benefit schemes, close existing ones to new employees and, perhaps, even lead to the wind-up and conversion of existing schemes."

At present more than three out of five workers are not covered by any occupational pension scheme. They must either provide one for themselves or else rely on the State pension.

For those people in occupation schemes, about one third are members of defined contribution schemes. This means they must shoulder the investment risk rather than rely on a defined final salary payment, says the article.

The Irish Banking Review is published by the Irish Bankers' Federation.