‘Levelling Down’ a threat to Pensions Plan

The Government’s plans for mandatory pensions by 2014 could mean lower pension cover for some workers.

Minister Mary Hanafin  yesterday unveiled the Government’s new National Pensions Framework, which aims to increase employees’ pension cover.   From 2014 onwards,  most workers will automatically join a new mandatory pension scheme. This scheme will require employees to contribute 4% of pay, with the State and the employer paying a further 2% of earnings, bringing the total contribution of 8%.

I am concerned that, for employees who already hold employer-funded pensions, the mandatory scheme may mean lower, not higher, pension entitlements.

At present, many workers participate in pension schemes where their employer contributes, say, 5% of salary, with another 5% being paid by the employee.  In the current environment, with employers under pressure to cut costs,  they may question the wisdom of such arrangements when the State-backed scheme requires only a 2% employer contribution.

If sufficient numbers of employers end their existing scheme and migrate their employees to the new mandatory scheme, this could represent a signficant hit to overall national pensions cover.

This phenomenon is known as “levelling down” and already has attracted much debate in the UK, where mandatory pensions will be launched in 2012.

Dr Ros Altmann, a pensions expert and a former adviser to Tony Blair, has warned in a recent press release, that “the new workplace pension savings accounts (in the UK)  could be a disaster for millions of unsuspecting individuals”, highlighting what she sees as the “huge incentive” for employers to “level down” their existing pension commitments to the State-scheme minimum.

What do you think?