Tuesday, 14 April 2009

Aon and levelling down

Last week Aon gave everybody a bit of a shock but cutting contributions to its money purchase pension scheme. Now we're used to employers closing final salary schemes to new members, even current members in some cases, and replacing them with DC schemes into which they pay lower contributions. But cutting contributions to DC scheme is a new attack on pensions.

From a company's point of view I can see the logic. It's a straightforward way to reduce costs and you will have a prety good idea of how much it will save you. As such it might not be surprising to see more companies try this approach during the recession. However one argument that strikes me as slightly barking is that advanced by Rod Altman, who told The Times last week that the Government was in part to blame, because of the impact of Personal Accounts.
She blamed the Government for encouraging the trend. "From 2012, its proposed personal accounts will only require employers to contribute 3 per cent," she said. "I have consistently warned about the ‘levelling down’ this will entail as employers . . . cut pension contributions to the minimum ‘official’ 3 per cent level."

This doesn't make any sense to me, either in respect of the Aon story, or in general. In terms of the Aon story, though the company is cutting its contribution, the minimum appears to be 6% - twice the minimum level that employers will have to pay into Personal Accounts. If Aon really was levelling down because of Personal Accounts why not go the whole hog?

Ahh... you might say... obviously Aon knows a cut of such a scale would be too steep, but the minimum of 3% at least gives them something to aim off. True enough, but currently there is no minimum employer contribution to pensions at all. So actually Aon can aim off 0%, not 3%, and still look relatively 'generous'. So on those grounds we might expect the introduction of Personal Accounts to mitigate employers cuts to DC schemes, if more follow Aon's lead.

More broadly, if employers are going to level down, why not do it right now? Currently they could reduce their pension contributions to 0%, and only up them to 3% in 2012 when legally obliged to. Or reduce them to 3% now? If the introduction of Personal Accounts really is going to be used by employers as a way to mask major cuts in pension provision, as people like Ros Altman argue, what are they waiting for? The whole argument looks shaky.

Which brings me on to my final problem with such 'analysis'. It's classic billiard ball stuff. A will cause B to do C. But as always which such a simplistic view of how systems involving us shaved apes operate, it doesn't stack up to well against reality. The 'B' in this case are employers. Whilst I don't doubt that some will screw down pension costs, I think they will do it regardless (though they may tell pollsters that it's 'because' of Personal Accounts). Others clearly will not, maybe because they will make savings elsewhere, maybe because they fear it may damage employee morale, whatever. Employers have a choice how to respond, and will exercise that choice differently. How employers choose to respond will determine whether there is levelling down or not - not Personal Accounts. And actually experience so far shows that few employers are following Aon, and suggesting that levelling down is overplayed in any case.

It's a weak argument all round.

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