Firms to exploit 'cheap' pension plan, say experts
Published 05/03/2010 | 05:00
EMPLOYERS will shut down existing staff pension plans and switch to the Government's new "cheaper" auto-enrolment system, experts warned last night.
Companies already struggling to stay afloat are set to exploit the new pension rules to cut the contributions they make to their workers' pensions.
The new pensions framework will only require employers to contribute 2pc of a worker's salary into the new mandatory supplementary pension.
And groups representing small and medium-sized firms claimed companies that do not currently have pension schemes would not be able to afford the contributions.
ISME chief executive Mark Fielding denied smaller firms would close off existing schemes or cut the contribution level for workers.
"If a company has an agreement with its workers to put in, say 5pc, then they won't be cutting it down to 2pc," Mr Fielding said.
But he claimed the new mandatory proposals would instead be used as a negotiating tactic to increase the level of employer contributions into the future.
"It won't be long before the 2pc contribution from employers will be negotiated upwards, as has happened in Australia."
Pensions adviser Justin O'Gorman of myadviser.ie said the fact that the contribution level had been set at 2pc for employers would mean most companies would come down to that level.
"There will be a race to the bottom. Companies that were paying 4pc or 6pc into a pension scheme for their staff will probably drop that down to 2pc."
His fears were shared by managing director of Deloitte Pensions, Ian Mitchell; Aidan McLoughlin of the Irish Brokers' Association; and managing director of pensions advisers Towers Watson, Ray McKenna.
Mr McKenna said: "The new proposals will ultimately lead to a dumbing down of existing pension provision."
ISME said the new auto-enrolment scheme would simply act as another direct tax on employment.
The main explanatory document given to the media by the Government on the new pensions framework recognises the risk that the auto-enrolment scheme could have a negative impact on existing occupational schemes.
"Some employers may find it simpler and less costly to encourage their workforce to join the auto-enrolment scheme rather than undertake the task of setting up separate pension arrangements," the National Framework Document states.
But director of employers' body IBEC, Brendan McGinty, denied that companies would shut down existing schemes because of the new system.
He said many company-defined benefit funds were due to close anyway because of funding problems.
Both ISME and left-leaning think-tank TASC were agreed that the new supplementary scheme for people not already in a pension should be state-guaranteed, instead of the funds being entrusted to private sector pension companies that have a poor track record.
Head of pensions policy at ICTU Fergus Whelan also questioned why private pension companies would run the different funds to be offered as part of the scheme.
He added that the move to up the retirement age was akin to stealing three years' pensions from workers who had paid to retire at 65 through their PRSI.