Page last updated at 16:07 GMT, Wednesday, 8 April 2009 17:07 UK

Aon to cut pension contributions

Elderly couple
Some firms are cutting pension contributions to lower costs

The British arm of the US insurance broker Aon plans to reduce its pension contributions to cut its costs.

The company employs 5,000 staff in the UK, most of whom will receive only a 6% standard employer contribution to their money purchase pension scheme.

However, Aon will match extra contributions made by the staff.

The company explained its unusual move by saying it needed to be "protected in challenging conditions" during the current worldwide recession.

"This is a way of managing costs. It's a fact that companies which make cuts early in a recession are those that come out stronger," said Paul McGlone, senior partner at Aon.

But the savings to the company will depend on how much employees contribute to their pension.

"We do anticipate making some savings under the new scheme, but we don't know at what level; it will depend on the take-up of the matching contributions," said a spokesman.

Aon has twice in the past decade taken steps to curtail the cost of funding its pension arrangements.

It closed its original final salary pension scheme to new joiners in 1999, then closed it to existing members in 2007, so that all its staff are now members of the money purchase scheme.

The latest changes will affect about 4,500 staff in the UK who are members of the scheme.

The Unite union said it was concerned the move might set a precedent.

"Aon's announcement has put us on standby and we will be keeping a careful eye on employers... We will not stand idly by and allow the herd instinct to take effect.

Changes

Currently, Aon staff pay in only 2% of their salaries to their pension scheme, with the company paying in between 6% and 12% on a rising scale as staff get older.

Joanne Segers, National Association of Pension Funds

That standard employee contribution will stay at 2%, but the standard employer contribution will also be capped at 6% at all age levels.

It means staff in their 30s, 40s and 50s face a big cut in their employer's contributions.

But those staff who want to make up for this can do so by paying in as much as 6% more themselves, depending on how old they are, with the firm then matching that.

Thus someone in their 50s who is happy to save a total of 8% of their earnings with the Aon scheme will trigger total contributions from the company of 12%.

In effect, workers wishing to maintain their pension level will have to contribute more of their salaries.

"Every member can get back to the same level [of company contributions] if they contribute more," said Mr McGlone.

New trend?

Aon is involving employees in a two-month consultation on its plan.

The past 15 years have seen widespread closures of final salary schemes to new members and, to a lesser extent, existing staff.

Typically, employers have replaced their older schemes with money purchase versions and they usually take the opportunity to slash their contribution levels at the same time.

Suspension of pension payments has become much more common in the USA
Mark Duke, Towers Perrin

Figures from the Office for National Statistics (ONS) last year revealed that final salary schemes had average contribution rates of 4.9% from members and 15.6% from employers.

However, money purchase schemes had an average contribution rate of just 2.7% from staff and 6.5% from employers.

Mark Duke, of pensions consultants Towers Perrin, said Aon's plan to cut its pension costs further was very unusual.

"Up until quite recently, some employers had been considering increasing their contributions," he said.

"But suspension of pension payments has become much more common in the US," he pointed out.



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