Julian Knight: Pension cut is glimpse into a poorer future

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The Independent Online

Sadly, Aon's decision to slash the amount of cash it pays into its employees' pensions is the shape of things to come. It's the next stage in a process which is seeing the rolling away of pension benefits just as we are all living longer and our expectations of what our living standards should be are extremely high.

This process started towards the end of the last millennium, when firms began to bale out of their final salary arrangements. A combination of a stock market downturn, increased longevity, asleep-at-the-wheel unions and Brown's piling on of regulation and short-sighted tax grabs on funds meant that firms' management no longer saw much use to the final salary concept – apart from their own bumper pension pots, of course.

Then we had a plethora of pensions legislation to stem the tide and a more orderly wind-down of final salary – outside of the public sector – took place. Now, with the recession in full swing and the collective bargaining of the workforce never weaker, we will see a cut in contribution levels into the money purchase schemes which have all but replaced final salary. If workers value their pensions, they will have to pay far more of their own salaries to keep them on track to produce any sort of decent return.

There is another subtler factor at play and I have been looking for signs of it for some time. There is a real danger that Aon is the thin end of the wedge and what we could see is the diluting of pensions in advance of the new personal accounts system to be introduced in a few years' time. Under the personal accounts system, employers, employees and the Government (in the form of tax relief) contribute to a pension pot to the tune of 8 per cent of salary a year. People who are members of more lucrative public and private sector schemes will be excused from joining personal accounts.

It has always been the danger that by introducing personal accounts, a new workplace pensions contribution benchmark will be set. In other words, 8 per cent contributions will become the norm when, at present, even contribution rates for money purchase schemes run at about 15 per cent of salary.

As for final salary pensions, the employers and employees generally contribute closer to 20-25 per cent of salary. But if contributions paid into private-sector workplace pensions fall to the level of personal accounts, then it will make the pensions paid to many (although far from all) in the public sector even more indefensible.

You could end with a situation where teachers get to retire in their sixties or even earlier on, say, half a pretty substantial salary, while many in the private sector will finally finish work in their seventies (if they can find work at that stage) and eke out their final years on state benefits and perhaps 10 or 20 per cent of their often now lower salary.

We are moving towards a new division in society based on who gets to work in the public sector and who doesn't. The deal Alan Johnson (now Health Secretary but a former trade unionist) struck with the unions over public-sector pensions prior to the last election looks even more conniving, gutless and plain stupid than it did at the time.

As for Aon's decision, I'm not going to rage against it. As I say, I have expected to see something similar for some time and more employers will follow, using the recession as the rationale. In a globalised economy, the UK workplace pensions system is seen as a huge drag on competitiveness. Ultimately, British workers are going to have to pay more into their own pensions, sacrificing a bit of the financial here and now if they want to avoid future poverty, while the Government, of whatever hue, is going to have to cut public-sector pensions.

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