The trend towards defined contribution schemes, where employees shoulder the investment risk and have no guaranteed payouts, is expected to continue and gain momentum, writes Clare O'Dea

In the past, it was easy to run a generous pension scheme when employees worked for 45 years and lived for five or 10 years after retirement. But the figures don't add up so neatly when people work for 30 or 35 years and live for 25 or 30 years after retirement. The problem is there is no magic formula to pensions, it's simply a question of saving a big enough pot of money to provide an income for life when you quit work.

So who should take responsibility for bankrolling you in retirement? Your employer, the State, your children, charitable organisations - or yourself? There are some 650,000 members of occupational schemes in the Republic, most of them in defined benefit schemes. Good for them. They pay, on average 5.3 per cent of their salary into their pension scheme and for that most of them will get a decent pension of one-half to two-thirds of their final salary.

Members of defined contribution schemes have no guarantee of a decent pension at the end of the day. Their pension is dependent on how much they and their employers put in and how good or bad the investment return is over their working life.

In defined contribution schemes, employees carry the investment risk, while the employer shoulders the risk in defined benefit schemes. It may all work out fine for defined contribution scheme members. But as most of these schemes have only been set up here in the last few years, we will have to wait about 35 years to find out.

At the moment 69 per cent of major pension schemes in the Republic are defined benefit. A drift is under way to defined contribution, and it is something the industry is watching closely. The Irish Association of Pension Funds (IAPF) published a new report yesterday, which shows that the rate of closure of defined benefit schemes is about 7 per cent over the past three years. "This is not as dramatic as many envisaged," Mr John Feely of the IAPF said.

However, he cautioned that the trend away from defined benefit schemes was likely to continue. This is due, Mr Feely said, to rising costs associated with improved life expectancy, reduced investment return in the future, the introduction of a new accounting standard and added regulation arising from the Pensions (Amendment) Act 2002.

"We expect the move to defined contribution to continue and gather momentum. The fundamental issues have not gone away and the problem is that there is less money going into defined benefit schemes."

The IAPF Benefits Survey 2002 is the most comprehensive picture of the Irish pensions' landscape to date. It surveyed more than 200 major pension schemes covering a total of 425,000 people. The report suggests that the challenge for employers and the industry as a whole is to ensure that members are sufficiently well informed to evaluate their post-retirement requirements and to plan and save as necessary to meet those objectives.

"This is going to have to be solved in a complex way. People will have to look at their own circumstances and decide what they are prepared to do," Mr Feely warned. At the very least, employees should take advice on topping up their contributions through additional voluntary contributions.

The report also confirms the trend towards early retirement. The normal retirement age in 14 per cent of defined benefit schemes is 60 or below. This rises to 33 per cent in defined contribution schemes.

Mr Feely believes that in years to come we'll look back on retiring at 58 or 59 as a very unusual quirk of history. It's possible now because pension funds are so well funded and investment returns have been exceptional over the past 20 years.

"It is not realistic to think we could generate that level of savings in the future," he said.

Mr Feely argues that we need to be more flexible in setting the State pension at age 65. "We would like to see a more gradual and flexible approach to retirement, with people being allowed to continue full- or part-time work into their 70s if they wish."

It is unlikely that the new generation pension to be launched later this year - the personal retirement savings account (PRSA) - will act as a panacea for all our pension ills.

The new flexible pension that aims to increase private pension coverage has the same inherent insecurity as a defined contribution scheme. What you get out depends on what you put in when you have the money. Oh, and your investment strategy will play a part as well, if that inspires you with confidence.

The most important thing you need to know about pensions is this: start saving early and if you can't start early, start now. That applies to PRSI contributions as well. No matter how little you earn, make sure it is declared so that you can make the minimum PRSI contribution and at least qualify for a non means-tested State pension in your own right.

The second most important thing to remember about pensions is that tax relief on contributions is available at your top rate of tax. If you are paying tax at 42 per cent, every €100 you save costs you only €58. So don't sit on your hands and let the years go by. You don't want to be kicking yourself in 2037 because you cannot afford to live retirement to the full.