Aon cuts pension matches overseas

Aon Corp., the world's biggest insurance broker, is reducing matching payments to employee pensions at its U.K. unit as the deepening recession increases pressure on British companies to curtail benefits.

This is the first time a large U.K.-based firm has cut payments to a so-called defined-contribution plan, said Aon spokesman Reuben Atchison. Employees over 50 will have to set aside four times more pay to keep the same level of company contributions, according to figures Aon released today.

"The worry will now be that other employers take advantage of the ease with which defined-contribution pension schemes can be cut," said Brendan Barber, general secretary of the Trades Union Congress.

Employers are cutting costs as the global financial crisis slashes profits and stock prices. Royal Bank of Scotland Group Plc yesterday said it may fire as many as 4,500 U.K. workers. In the U.S., companies including General Motors Corp. and Motorola Inc. have reduced matching payments to employee pensions.

"In the current economic environment it is much easier for employers to justify the reduction in pension payments," said Matthew Giles, a Birmingham-based pensions lawyer at Hammonds solicitors. "Cutting costs rather than jobs that is seen as more palatable."

Under current rules, Aon employees who put 2 percent of their pay into the pension plan receive a company match of 6 percent to 12 percent, depending on their age. In the new plan, matching payments will be capped at 6 percent for everyone who saves 2 percent of their pay. Workers can increase the company contribution by setting aside more of their salaries.

'Greater Efficiencies'

Chicago-based Aon said the reduction in pension payments was preferable to freezing pay or reducing hours. The Financial Times reported the story earlier today.

"To ensure we emerge from the recession strong and successful, no stone is being left unturned during 2009 to drive out further costs and to achieve greater efficiencies," Aon said in the statement. "The increasing cost of pension provision is one of those costs."

The changes come as traditional defined-benefit plans, which guarantee workers a percentage of their final salaries, are in decline.

In the U.K., the number of private sector employees in defined contribution plans dropped to 2.7 million last year from 4.6 million in 2000, according to the Office for National Statistics. The number of workers in defined-contribution plans remained steady at about 900,000.

Triple Whammy

"This is a triple pensions whammy," Barber said. "Staff first lost their salary-related scheme, next saw their pension pots fall as shares crashed and now face what is in effect a choice between a salary cut or a further pension cut."

A PricewaterhouseCoopers LLP survey published Feb. 18 showed 69 percent of FTSE 100 companies were concerned about pension funding commitments. U.K. companies' liabilities for defined-benefit plans increased 4.3 percent to 914.7 billion pounds in the year ended Jan. 30, according to the Pension Protection Fund.

BT Group Plc, with more than 340,000 people in the U.K.'s largest company retirement plan, changed its pension program in November to reduce costs. The company proposed to raise the retirement age to 65 from 60 and build up pension entitlements at a slower rate.

BP Plc, Europe's second-largest oil company, last month said its total pension deficit widened to $8.7 billion as of Dec. 31 from $301 million a year earlier.

Retailers including Mothercare Plc and Beale Plc may close defined pension plans to existing members, according to analysis by U.K. consulting firm Pension Capital Strategies Ltd.

Regulator Warning

British companies can't cut off funding to defined-benefit plans while continuing to pay dividends, the U.K. Pensions Regulator said Feb. 18. Firms may shift payments to later years or, if they're under more serious pressure, extend the length of pension recovery plans, the regulator said.

The government is introducing laws that require companies to automatically enroll all workers in a pension in 2012. That will put more pressure on employers to fund their pension contributions, according to Hammonds' Giles.

"That will increase membership and therefore costs to employers," Giles said. "As extra pension costs will be coming through, I guess some companies are looking to reduce their current payments."