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Contributory factors

Other firms look set to follow Aon’s lead in cutting contributions into its pension scheme.

Employee benefits consultancy Aon will be reducing its employer pension contributions into its defined-contribution scheme by up to half in a bid to lower costs.

Under current arrangements, the standard employer contribution rises according to age, with people over 50 getting a 12 per cent contribution. Under the proposed arrangements, the employer contribution will be cut to a flat rate of 6 per cent across all ages.

Aon advises other companies on their pension schemes and independent pension consultant Ros Altmann believes it sets a precedent for employers to cut contributions and says the move heralds problems for future pensioners.

She says: “This has huge significance as Aon is clearly signalling a loss of faith in pensions and a preference for cutting pensions over other forms of cost-cutting.”

Hargreaves Lansdown senior pensions analyst Laith Khalaf says: “It is hard for Aon to advise companies not to do this when they are doing it themselves but they are still offering a pretty generous pension, comparatively speaking.”

Khalaf adds that, in the past, Aon has been a forerunner of pension trends. In 1999, the company closed its defined-benefit scheme to new members and in 2007, closed the scheme to future accruals and moved all staff into its DC scheme.

“Aon has historically pre-empted what happens in the pension arena and it may do so again with this latest move.”

Aviva is also ending its free pension for 16,000 staff and will be asking all members to start contributing from July.

Members of Aviva’s DC scheme have not had to make any contributions but from July they will have to pay 1 per cent of their salary into the scheme and from April 2012, they will pay a minimum of 2 per cent.

Standard Life head of pensions policy John Lawson says the trend in the US to cut pension contributions will inevitably travel to the UK. He says FedEx, General Motors and Motorola have all reduced contributions to their 401(k) schemes in the past year or so.

Lawson says: “Manufacturing companies felt the recession very quickly and their response was to cut contributions to 401(k) plans. It is probably more acceptable in negotiations with employees to cut pay or benefits rather than employees if it is an option. It is a tough time for employers.”

He says as many UK firms have parent companies based in the US, this practice is likely to spread to the UK quickly.

Watson Wyatt carried out a survey among 160 companies on the impact of the financial crisis on their employee benefits last December.

Only 6 per cent of employers say they expect to make changes to their DC schemes to reduce costs within the next 12 months and 4 per cent expect to make changes in one to three years time.

Four per cent have already made changes but 86 per cent expect to make no changes.

Watson Wyatt senior consultant Paul Macro says: “What Aon has done will probably mean that some other companies will follow suit, in the same way that a few years ago we saw Rentokil close their DB scheme and others followed but I am not 100 per cent convinced that we will see a flood of companies cutting their contributions to DC.”

Macro believes employers are more likely to adjust their DB schemes as these represent the biggest costs.

He says: “Aon had no DB scheme so had no other option but to reduce DC contributions. Most large organisations still have a DB legacy, so I would expect them to make changes to this first.”

Lawson says now might be a good time for employers to look at their pension schemes because employees are feeling less secure in their jobs and are more likely to accept change.

But he believes that such changes may only be temporary as once the recession is over, employers will have to start competing for the best people by offering attractive benefits.

He says: “It is not necessarily a one-way thing that employers are hoping to get away with. They may put the contributions back up after the recession.”

Khalaf disagrees and notes that the introduction of personal accounts in 2012 means employers will be faced with much higher costs.

“Although it is not necessarily a one-way street, it is very difficult for employers to increase contributions again once they have cut them. In 2012, they are going to have much higher costs imposed on them anyway, so are they likely to increase contributions again?”


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Allianz Global Investors has brought out the RCM European equity income
fund, an Oeic investing in blue chip companies in continental Europe that
pay dividends.

Move to improve transparency

The Government will be publishing a Treasury paper with recommendations to improve the transparency of financial institutions.

Two-way tug

With the Budget known by the time you read this, I feel making any predictions on the short-term direction of markets risky. What does seem likely is that the two-way pull that has characterised the influences on investor psychology will continue for some while yet.

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