Cuts threat to defined-benefit plans
Published 09/11/2010 | 05:00
CUTTING the contributory old-age pension will push private sector defined-benefit schemes further into deficit and increase the public sector pensions bill at a stroke.
This is because most pensions in the private and public sectors take the state pension into account when calculating the final pension amount, pensions experts said.
Some two-thirds of final salary, or defined-benefit, schemes integrate the state contributory pension into the figure paid out to those retired from the scheme.
Typically, a defined-benefit scheme meant someone with a full 40 years' service would get a pension of two-thirds of their final salary.
But the scheme would subtract the €230-a-week state pension amount from what it paid out, according to Brendan Kennedy, chief executive of the state regulator, the Pensions Board.
A similar arrangement exists for those working in the public service who were employed since 1995, and firefighters and lower-paid workers.
Maurice Whyms of the Irish Association of Pension Funds (IAPF) said lowering the state pension would increase the deficits in private sector defined-benefit schemes.
Eight out of 10 defined-benefit schemes in the private sector are in deficit.
The IAPF has lobbied the Government not to cut the old-age pension, Mr Whyms said.
Meanwhile, the IAPF and Standard Life have come out in favour of capping the contributions that can benefit from tax relief in a pension, instead of cutting the tax relief rate.
The Government's proposal to reduce pension tax relief from 49pc to 33pc will decimate pension savings levels and make people even more reliant on the state pension.
"It not only risks relatively impoverishing ordinary savers in their retirement but also threatens over 1,000 pensions industry jobs," said Nigel Dunne, chief executive of Standard Life.
The British pension solution implemented last week appears much fairer to everyone. Tax reliefs remain unchanged but the amounts that can be invested in pensions have been capped, Mr Dunne said.