Employers warn of pay cut to fund pension plan
Published 04/03/2010 | 05:00
EMPLOYERS last night warned they would be forced to cut workers' pay to compensate for having to contribute to their pensions.
The threat came after the Government unveiled the most radical pensions' shake-up in the history of the State.
Under the new measures, all workers will have to pay 4pc of their incomes into a pension scheme for their retirement.
Their pensions will be boosted by a 2pc contribution from employers and a further 2pc from the State.
However, employers' group IBEC warned the Government that firms would be forced to cut workers' pay to cover their losses.
"Pay cuts are one of a menu of options employers will have to consider," IBEC director Brendan McGinty said. The warning was issued after the Government confirmed that everyone in a job and over the age of 22 will be automatically enrolled into a pension scheme, if they are not already in one.
The new rules announced by Taoiseach Brian Cowen, Finance Minister Brian Lenihan and Social and Family Affairs Minister Mary Hanafin -- exclusively revealed by the Irish Independent earlier this week -- are due to take effect in 2014.
Anyone who is 49 or younger on their birthday this year will not qualify for a State pension until they reach 68.
Those aged 50-55 this year will have to work until they are 67, while those in the 56-62 bracket will have to work until they are 66 before they get the state pension.
Those between 63 and 65 this year will get the pension at 65. This means the state pension age will rise to 66 in 2014, to 67 in 2021 and finally to 68 in 18 years' time.
Ms Hanafin said the new mandatory pension was likely to only apply for those earning between €18,000 and €50,000, but those income limits have yet to be decided on.
Those who end up in the new pension will see the State putting €1 into the pension fund, with the employer putting in another €1 for every €2 contributed by the worker.
Mr Cowen said spending on public pensions would increase from 5.5pc of GDP to almost 15pc in 2050.
The new system was needed to ensure that older people would have adequate income in retirement, without placing huge strain on the public finances, Mr Cowen said.
"This is not an easy circle to square," he said.
Ms Hanafin said: "It is simply not sustainable that we can afford a pension system based on the current model which allows people to spend almost as long in retirement as they do in the workforce."
But pensions' experts last night warned that many employers were likely to react to having to shell out on pensions by cutting pay for their staff.
"It is highly probable that employers will react by reducing salaries," IFG corporate pensions director Fionan O'Sullivan said. He said many workers who were already struggling would be pushed over the edge financially.
Workers who are enrolled into the new mandatory pension will make their contributions through the Pay Related Social Insurance (PRSI) system.
They will be required to invest in private pensions' funds, with the State tendering for insurance companies to provided a selection of funds for the scheme. However, there will be no state guarantee for the funds.
There will be a low-risk option, where money put into the fund is invested in bonds and cash, rather than stocks.
The Government also yesterday signalled a change to the tax reliefs a higher-rate taxpayer who is in a pension scheme can claim.
At the moment, a PAYE worker in a private pension scheme who pays tax at the 41pc tax rate can claim tax relief at 41pc, and also claim relief on PRSI (4pc) and the health levy (between 4pc and 5pc).
This means it costs €51 for every €100 of pension money.
Currently, those paying tax at 20pc get tax relief at that rate, plus relief on PRSI and the health levy.
But by 2014 the tax reliefs for everyone will be 33pc, plus relief on PRSI and the health levy.
This means it will now cost a higher rate taxpayer €59 for every €100 of pension pot.
Pensions advisers Mercer said this change would mean higher-rate taxpayers would be subject to double taxation when they draw down their pension.
This was because they would only get tax relief at 33pc, but would pay tax at 41pc when they come to retire.
Mr Lenihan said he was planning to bring in new pensions arrangements for those who joined the public sector from now on.
Future pensions will only have increased based on the inflation rate and not on the pay rises for the position they had retired from.
The retirement level would be based on career average earnings, rather than on final salary.
However, anyone currently in receipt of a pension would not be affected by the Government's new National Pensions Framework.