THE NUMBER of people contributing to occupational pensions in Ireland is falling, with over half of Ireland’s workforce now without a pension, according to recent research by Red C on behalf of pension brokers Invesco. Some 51 per cent had no pension, with females and young people least likely to have one, it revealed. A separate survey by the Central Statistics Office last year indicated a drop in private held pensions by self-employed workers from 47 per cent to 36 per cent.

With the age at which people receive the old age pension set to rise to 68, putting a plan in place is vital. However, set against a backdrop of falling incomes and increasing taxes, funding retirement is more of a challenge.

The poor performance of funds in recent years and the Government decision to impose a 0.6 per cent levy on pensions have not helped matters either.

Speaking at a recent conference on pensions, Gerry Hassett, chief executive of Irish Life, Ireland’s largest pension provider, acknowledged the need to do more for lower paid workers and for women. In the case of women, Hassett said that they faced particular challenges as “they have less opportunity to build a pension pot given the more stop-start nature of their working lives”.

Hassett revealed that 85 per cent of Irish Life’s pension customers earn less than €70,000 per annum and were trying to provide for relatively modest incomes in retirement. “The private pensions industry is built on the people of middle Ireland and they need to be supported in their efforts to make provision for retirement,” he said.

While the pensions levy and recent reductions in the level of reliefs available on contributions have been a disappointment for those trying to promote pension investment, Munro O’Dwyer of PwC says that pensions are still a vital instrument in planning for retirement. “Pensions still provide a very tax-efficient way of deferring income at the marginal rate of tax and you have all the benefit of gross roll-up of your contributions,” he says. “With the right strategy, a pension can perform very well over the lifetime of contributions.”

While all experts agree on the importance of starting as early as possible with a pension, which maximises the potential pot while lowering the cost of funding, O’Dwyer says psychology plays a huge part in pension planning. A young pension investor who sees a poor performance in a year can be put off for life.

With the heavy weighting of many funds towards equity markets, for example, high short-term swings can produce results that leave investors feeling burnt. “A major gain in a fund’s performance in the early years has little impact on an investor as they have so little invested. A big swing downwards, however, can destroy someone’s confidence in the very idea of pensions to the point where they stop contributing at all,” he says.

Pensions, he says, should be seen as savings instruments rather than investment instruments and should be managed with the risk profile appropriate to the person contributing. “It’s important to get people feeling confident about their investments rather than have them shooting for the stars.”

Andy Kelly of brokers Invesco agrees. He says that there is an increasing interest in the notion of more conservative investment vehicles such as Absolute Returns. These funds target a specific level of return – say 5 per cent, for example – and the fund is managed actively to produce a return on this level. In practice, this means avoiding over-exposure to more risky assets such as equities. An Absolute Return fund would typically have a cap of 40 to 50 per cent in its equity exposure, unlike a Managed Fund that would more likely have a 70 to 75 per cent equity exposure.

“There is certainly less appetite for risk at the moment. One of the reasons for this is that the rates available on deposit at the moment are particularly good. When an investor is getting a guaranteed 4 per cent return on their cash in a deposit account, they have less incentive to invest in an equity-based fund. That will change when the deposit rates fall,” Kelly says.

The poor performance of managed funds over the past 10 years has certainly damaged confidence in the industry but a more robust performance has been recorded over the past three years with average funds growing by 14 per cent per annum over that period.

There are some worrying trends, however. The ratio of “workers to retirees” will drop by half by 2030, from 6:1 to 3:1, with huge implications for the country’s ability to support pension payments for those dependent on state pensions. Any tinkering with tax relief in future budgets is likely to erode the level of contributions by workers to private pensions. The Red C/Invesco survey, for example, suggested that four in 10 would either cease or reduce their contributions in this scenario. Were this to become a reality, the proportion of the working population with private pension coverage could drop to as low as 30 per cent.