Pension fears as Aon slashes payments

Published on Wednesday 8 April 2009 22:08

FEARS are growing that workers will face swingeing cuts to their pensions after the UK arm of a leading insurance firm revealed plans to slash its contributions by as much as half.

Financial experts have warned that other companies will follow suit as employers look to streamline costs in a desperate attempt to survive the economic downturn.

The UK section of insurance giant Aon yesterday revealed plans to cut its standard pension contributions to reduce costs, in a move that could have massive implications for British workers relying on a pensions "nest egg" from their employers.

Last night the company explained the move by saying it needed to be "protected in challenging conditions" during the current worldwide recession.

Dr Ros Altman, a pensions specialist and governor of the London School of Economics, said the fact that Aon advises other companies on their pension provision meant the move was likely to be replicated.

"Given it is a pension company that is leading the way here, if they say 'It is fine, let's go ahead' then other companies will follow," she said.

Pension cuts are seen as the latest weapon for employers to claw back costs while avoiding pay freezes and compulsory redundancies. Increasingly, firms are opting for defined contribution pensions, which are cheaper and leave the employee to bear all the investment risk.

Aon, which said it understood that "times are hard for employees", said it wanted to take longer-term measures to deal with tough economic conditions, rather than opt for pay freezes, reduced hours or enforced sabbaticals on low pay.

"This approach recognises that employees want to retain their pay to allow them to make choices," Aon said. US insurance broker Aon employs 5,000 people in Britain, most of whom will receive only a 6 per cent standard employer contribution to their money purchase pension scheme.

The firm wants to reduce the base amount it pays into the pension pots of its UK staff and to add a variable top-up rate based on an employee's age and contribution. The result is workers will have to increase the amount they pay into their pension to maintain contributions at their current level.

This latest move is being watched closely by employment lawyers who said even the "sacred cow" of final salary pension schemes – under which employers state how much a pension will be worth at retirement – could come under threat.

David Knox, a pensions law partner with Dundas & Wilson in Edinburgh, said some staff were faced with the stark choice of having their pensions cut or losing their jobs. "These measures would have been pretty much unthinkable a few years ago, but this underlines the recession we are in," he said.

Increasingly, workers are having to save for their retirement through defined contribution pension schemes as companies close their more generous final salary ones to new members.

Union leaders said yesterday that they would be keeping "a careful eye" on employers who may try to use the credit crunch as a cover to permanently cut pension contributions.

Falling chances of a comfortable retirement

FROM gold-plated final salary schemes to the basic state pension, the decline in provision over the past decade has been profound, writes Personal Finance Editor Jeff Salway.

The biggest shift has been in final salary (or defined benefit) pensions, based on salary and length of service and allowing workers to plan for retirement knowing how much they could expect to get from their pension.

But just a quarter of the UK's 8,490 private-sector final salary schemes remain open to new members. In contrast, the number of workers in public- sector final salary schemes has increased since the mid-1990s.

About half of the final salary schemes still open to new members are likely to close in the next five years, the National Association of Pension Funds has estimated, while one in four of the UK's biggest employers expect to close their final salary schemes to existing members in the next few years.

Most people saving through workplace pensions now do so through defined contribution (DC) schemes, which are not guaranteed but based on contributions and investment performance.

These pensions have been battered by stock market losses over the last year. Since the outset of the credit crunch in September 2007, DC pension assets have slumped by a third, from 550 billion to 368 billion, according to Aon Consulting.

Those already in retirement are also suffering. It is estimated that the basic state pension is now worth just 16 per cent of average earnings, compared with 26 per cent in 1980.

WHAT IT ALL MEANS FOR WORKERS

SCENARIO 1

A 35-year-old male retiring in 30 years' time and earning the average Scottish salary of 28,300 (then rising at 3 per cent a year with inflation) would lose out by 189,801 at retirement if his employer halved its contributions to his pension from 12 to 6 per cent.

Company pays 12 per cent contributions:

A 35-year-old male paying 2 per cent of his 28,300 salary a month into his pension is contributing 56.59 a month (including 20 per cent tax relief). If his employer pays 12 per cent of his salary its contributions would total 283 a month.

Total employer and worker contributions are 339.59 a month, 4075.08 a year and provide a pot at retirement at 65 years old of 456,331, giving an annual pension of around 16,000.

SCENARIO 2

Company pays 6 per cent contributions:

A 35-year-old male paying 2 per cent of his 28,300 salary a month is contributing 56.59 a month (including 20 per cent tax relief). If his employer pays in 6 per cent it is contributing 141.50 a month.

In total the employer and worker contributi ons would be 298 a month, 3,576 a year and provide a retirement pot at 65 of 266,530, giving an annual pension of around 9,345.

SOURCE: Aegon