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Pensions in peril

Will Aon’s move to cut contributions be the death knell for decent workplace pensions?

Industry experts are nodding their heads. The consultancy announced last week that it is slashing the contributions it makes to its money purchase pension scheme by up to half in a bid to cut costs and stave off job losses in the currnet economic climate.

Currently, the contributions Aon makes rise with age, with people over 50 getting 12 per cent. But the maximum will be cut to 6 per cent for everyone under the new rules.

But the worrying thing, according to Hargreaves Lansdown pensions analyst Laith Khalaf, is that Aon tends to pre-empt mainstream employer pension policy in Britain.

This is primarily because Aon is in the business of advising other employers about their pension arrangements.

He says: “In the past Aon has pre-empted mainstream company pension policy in the UK. The firm closed its final salary scheme to new entrants in 1999 and to future accrual in 2007. It is hard to see how Aon’s consultants can now advise their clients with similar arrangements to maintain them without their fingers crossed behind their back.”

Pensions guru Ros Altmann claims the move is of “huge significance” for this reason.

She says: “Aon is a company which advises other employers on their pension arrangements. It is clearly signaling a loss of faith in pensions and a preference for cutting pensions over other forms of cost cutting. This is the thin end of the wedge. It looks like the start of the next phase of employer withdrawal from pension provision.”

As we move closer to the introduction of personal accounts in 2012, the problem will only be exacerbated, according to Altmann.

She says: “Government policy is encouraging the trend still further. From 2012, personal accounts will only require employers to contribute 3 per cent. I have consistently warned about the leveling down this will entail.”

Khalaf says Aon’s move is “a dark omen” for auto-enrolment.

He says: “If companies are already uncomfortable about their pensions spend then how are they going to feel when their costs potentially double because they have to enrol all of their staff? Only the best firms will maintain contributions unless we get a very fair economic wind that blows us into much more favourable waters by the time auto-enrolment arrives.”

In other news, a number of advisers have been urging their clients to make planned pension contributions now in anticipation that Chancellor Alistair Darling will scrap higher rate tax relief in next week’s Budget.

While speculation like this always occurs before Budgets, Money Marketing understands the issue is being considered more seriously this time around, potentially as a means to pay for a boost to the Isa regime.

Obviously Dennehy Weller & Co agrees. The firm emailed its client bank last week suggesting they hurry up if they are planning to make regular or lump sum contributions.

Managing director Brian Dennehy says: “There is no doubt that the Government, and its finances, are under huge pressure. Gordon Brown is going to have to introduce unpopular measures and it is difficult to see how higher rate tax relief on pension contributions, a perk for the rich, can be sustained. There is nothing to lose in bring forward contributions and a significant chunk of tax relief can be locked-in.”

Killik & Co has written similar letters to its clients.

It is estimated the Treasury could save around £2.3bn from the move but the benefits could be negated if employers and employees start properly utilising salary sacrifice. It is also questionable whether Darling would introduce any changes this year.

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