If you are considering whether you would be better off in a defined benefit or a defined contribution retirement scheme, remember to take risk as well as return into account.
"Over the long term, the potential excess returns achieved by investing in a defined contribution fund must be considered in the light of the extra risks that will be taken to achieve these returns," Claude van Cuyck, Gryphon equity analyst and portfolio manager, says.
To make an informed decision you must know about the alternatives in the market and you must take your own risk management and tax needs into account, he says.
"Unfortunately, many individuals are not in a position to make a well-informed investment decision," Van Cuyck says.
And the fact that pension funds allow members access to their pension fund savings when they change jobs means that many people spend the money instead of re-investing it for future retirement needs.
The main advantage of defined contribution funds is that the member will reap all the benefits of the upside returns generated by his or her retirement.
"This is very attractive in a bull market, especially the bull market that has been experienced in the United States over the past few years. No wonder defined contribution funds have been gaining momentum recently," Van Cuyck says.
"The greatest risk, however, occurs in a bear market. This is especially risky when an individual is close to retirement and the market crashes (as it did in September 1998). If a fund loses 40 percent of its value just before retirement, you may see no gold in those Golden Years."
Defined contribution funds have overtaken defined benefit funds in many countries including the United States, Australia, Switzerland, Spain, Hungary, the Czech Republic, Thailand and Denmark. In Britain the trend is still gaining momentum.
For employers, the salary bill is more predictable and there is no risk of having to fund a pension fund deficit that might arise from volatility in the markets.
In a defined benefit fund, on the other hand, where the risk is passed onto the employer, the employee foregoes any excess returns generated in sustained bull markets.
"The general move from defined benefit to defined contribution has increased the responsibility of both trustees and individual members to manage their investment strategies," Doug Thomson, institutional business development manager at Investec Guinness Flight, says.
Investec has just launched a range of risk-profiled funds which enables retirement funds to provide members with different portfolios from which to choose according to their own needs.
The "one-size-fits-all" approach to retirement funding is becoming redundant with the shift to defined contribution funds and there is an increasing demand for investment alternatives which match each member's risk profile, Thomson says.
"Members should think of their investment strategy in terms of a curve, with their position on the curve determined by their age, years to retirement and personal financial circumstances. As the member progresses along the curve, exposure to bonds, equity and cash can be adjusted to optimise returns within the member's investment constraints."
Cash shows the least volatile returns, and equity the most, with bonds somewhere in between; but over the long term, equity generates the highest returns, followed by bonds and then cash.
"On this basis it is easy for members to see that the longer they have before retirement, the higher the equity weighting should be in their portfolio. On the other hand, members who are approaching retirement or who are retired need more certainty in their investment returns, so they should have a bias towards cash and bonds."
But whether retired or not you do need shares in your portfolio, Thomson emphasises.
"While people may retire at 60 or 65 they will need an income for the next 20 to 30 years. An equity component generates capital growth and income from dividends - both are required to ensure sustained long-term income."