Pensioners have mixed feelings about £5 income rise awarded in budget

The additional £5 for old age pensioners which the Minister for Finance doled out in the budget is the largest single increase of its kind. It is a tangible rise that will buy more fuel or food, pay a monthly telephone or electricity bill, or buy what many of the rest of us take for granted - a night out at the cinema or theatre.But not all pensioners are convinced they will benefit from this increase r previous increases announced in past budgets.Mr D from Foxrock is one such reader who believes that 50 per cent of pensioners who are in receipt of an occupational pension and a State Contributory Old Age Pension do not benefit from these increases.According to Mr D a practice began in the 1970s which allowed employers to link their pension benefits to those of the State Old Age Pension for the purpose of capping the combined benefits at two thirds of final salary.This resulted, he says, in any State increases above inflation not being passed on directly to pensioners, but rather clawed back by employers who adjust their contributions accordingly."Since then, however, successive governments have been granting increases in the Old Age Pension at rates much higher than the rate of inflation. For example, the value of the OAP in 1971 was £4.95 a week. The current pension is £78 which represents a massive increase of 1,416 per cent. Inflation, on the other hand has increased by 702 per cent, a large increase but only half the level of pension increase."Mr D's central question is what happens to the increases in State benefits that exceed the rate of inflation if a company only increases benefits by inflation, or not at all? "Who gets this money? Certainly not the pensioner."Instead, he says, the additional benefits, paid by the Exchequer are "unknowingly financing private pension schemes at the expense of ordinary pensioners and PAYE workers."We put Mr D's charges to Mr Paul O'Faherty, chairman of the Irish Association of Pension Funds, which represents the pension industry and members of occupational schemes."Your reader is both right and wrong. It is correct that the majority of private sector and public sector pension schemes are co-ordinated with the State to deliver a two-thirds of final salary pension benefit."It came about as a cost issue," he says. "By taking account of State benefits, both the employer and employee could reduce their contributions to the pension plan during the years of work, thus making more income available. "Since the target was to provide two thirds of salary at retirement, there was no point in over-providing since that just meant you deferred spending power." Our reader's analysis is incorrect on two fronts, says Mr O'Faherty. "The State pension has not been eroding occupational pension income. In fact, the State pension has actually been declining in real terms. In 1982, the OAP was worth 33 per cent of the national earnings; today it is worth just 27 per cent."In reality, defined benefit pension schemes have picked up that slack. Let me put it this way: if an employer promised his workers that they would receive two thirds their final salary as a pension, but the State benefit continued to decline, proportionate to the occupational contribution, the employer would be obliged to offset that reduction."According to Mr O'Faherty, once the occupational scheme member retires, any State pension increase is automatically passed onto the pensioner without any effect on the benefit received from the employer.The State increase is taken into account for the purpose of determining the size of the contribution to the private scheme only.The pension cheque the company pays out is not affected and the pension receives the higher State benefit.In other words, a pensioner who receives, says, a cheque for £100 a week from his company, plus £78 a week from the State will, from next June, continue to receive the £100 company cheque plus £82 from the State, the new rate.The workers of the 40 per cent of companies which have not linked their occupational benefits to those paid by the State are the real losers, if you can use such a term in this case.Not only are contributions made themselves and by their employer not reduced in line with any State pension increase, but they are likely to end up having to pay more in PRSI to fund the rises in State benefit foreseen by the Minister over the next few years.