Mercer's, investment consulting practice, has cautioned investors against panic in the face of the slump being experienced in global equities. The consulting firm has urged pension trustees to avoid making knee-jerk decisions driven by short-term market considerations.

The difficult climate experienced by investment markets over the past 18 months, inflationary pressures in the Irish economy and the terrorist attacks in the US have reduced returns for Irish pension funds to their poorest level in more than 20 years, according to the analysis released by Mercer.

Although many pension investors are concerned about the sharp declines in equity markets in recent times, equities are still the appropriate long term investment option, according to the Mercer analysis.

The advice from the firm is different for defined contribution or personal pension plan members with a relatively short time to go before encashing their fund.

According to Mr Tom Murphy, of Mercer, recent market events should focus the mind on what needs to be done. " You should start now to take an active role in setting an appropriate investment strategy for the future." For those close to retirement that means moving out of equities and into fixed interest and cash.

"With about five years to go to retirement, you should seriously sit down, think about how to protect your investment and seek advice."

Mr Murphy said concerns about the impact of depressed market conditions on the sufficiency of pension fund assets were valid as these market declines fed directly into the returns achieved on pension funds.

Mercer maintains that this negative situation has also been exaggerated as a result of rising Irish inflation, which has reduced the purchasing power of future Irish pensions.

Irish inflation for the period March 2000 to September 2001 was 8.3 per cent.

An analysis of the past 15 to 20 years shows that the most recent 12-month return is the poorest for many years at minus 18.6 per cent.

However, Mr Murphy points out that the 12-month period to September 2001 followed a period of extraordinarily good returns from equity markets. A comparison of annual returns shows that the most recent five-year period, which includes the recent market downturn, still shows a healthy annual return of 11.1 per cent.

Over the same period inflation has averaged just 3.3 per cent per year.