Tax breaks ‘needed to protect pensions’

PENSION schemes that guarantee a percentage of final salary will die out unless employers are given tax breaks to keep them in place, a leading pensions consultancy said yesterday.

International human resources advisers Mercer called on new Finance Minister Brian Cowen to use December’s Budget to make defined benefit pension schemes more attractive for employers.

Mercer said employers should be allowed offset their contributions towards employee pensions against their PRSI bill.

Mercer senior consultant Joyce Brennan said there was “immense” pressure on defined benefit schemes and that tax breaks to protect them were urgently required.

Defined benefit schemes have become less popular because they require employers to take risk on the performance of equity markets and have become more costly in recent years.

Employers have shifted towards defined contribution schemes because they transfer the risk of poor performance to individual employees, so that their final pensions suffer if stock markets fail to perform as expected.

Ms Brennan said many defined benefit schemes were being closed to new employees, cutting the level of benefits available on retirement or requiring higher contributions from employees.

Some employers had chosen to wind up their schemes and replace them with defined contribution versions instead.

“The Irish defined benefit pension scheme is at risk of closure on a similar scale to the UK, where approximately 60% of defined benefit pension schemes are closed to new members,” said Ms Brennan.

“If relief against employers’ PRSI was considered, it would make a significant contribution to maintaining defined benefit schemes in Ireland, as well as easing the significant costs on employers.”

This move would also relieve pressure on the State pension system, she said.

Mercer also called on the Government to close a loophole that penalised employers that stumped up hefty lump sums to make up shortfalls in their pension funds.

The present system only allows tax relief for such contributions to be spread out over a number of years, rather than matched against the payment in the year in which it is made.

The current system for transferring funds to and from foreign pension schemes was also due for an overhaul, said Ms Brennan.