Pensions have become the touchstone for the Towards 2016 agreement, as Bertie Ahern lin es up with unions to warn firms against cuts to benefits, writes Dominic Coyle

Pensions proved the crunch issue at the end of five months of talks over a new national wage agreement. So contentious was it, that it delayed the parties finalising the deal.

Now, just weeks into the Towards 2016 accord, it is once again the subject of pensions that threatens to unravel the fledgling agreement.

Bank of Ireland's decision to close its defined benefit pension fund - where employees receive a guaranteed income in retirement determined by the number of years served - to new employees has angered the Irish Bank Officials' Association (IBOA), which accused it of disregarding national agreements and enhancing profitability at the expense of new employees.

As the two sides entered the Labour Court yesterday, Taoiseach Bertie Ahern entered the fray, warning employers against rolling over the pension entitlements of workers.

Speaking at a Labour relations Commission symposium on New Perspectives on Workplace Change, he departed from a prepared script to say that the practice of companies reducing pension benefits was a "tension point" for workers.

The Taoiseach was careful not to mention any companies by name but said "I know everybody will know what I mean in this".

"I quite frankly believe that the employers have got the pensions thing wrong," he said. "This is a very big issue for workers. It would involve changes to workers' terms and conditions. It is not an issue where people can just roll over the entitlements of workers."

Bank of Ireland is by no means the first employer to try to implement changes in what are increasingly costly pension schemes. Rival financial services group Irish Life & Permanent only recently concluded a Labour Court process by agreeing to keep a defined benefit pension scheme open until the end of the year to new entrants before switching to a defined contribution arrangement.

Independent Newspapers has also been in dispute with workers over its plans to amend pension benefits as has the Regional Newspapers of Ireland group.

Close to 1,500 defined benefit schemes were in place in the State at the end of last year, representing almost 500,000 workers, according to the Pensions Board, which regulates the industry. That is more than twice the 235,000 people in more than 80,000 defined contribution schemes - where the ultimate pension is determined by the level of contributions to a scheme and the investment performance of those contributions.

But the trend appears to be going only one way. A report by benefits consultants Mercer earlier this year noted that 38 per cent of defined benefit plans were now closed to new entrants. That figure, it said, was likely to rise to 60 per cent by the end of 2008.

However, Tom Geraghty, head of Mercer Investment Consulting noted that only around 5 per cent of DB schemes were closing entirely.

"The trend certainly is that this has become so costly for employers that they are critically looking at it into the future," he said. "They are looking to move risk away from the company."

Several factors are driving an increase in pension costs. People are living longer and wages are rising more quickly than projected. At the same time, even buoyant stock market returns are failing to offset rising liabilities as a result of low interest rates and falling bond yields.

This has been compounded by a rigorous funding standard and new accounting rules that force companies to account for pension fund liabilities on the basis that the company was wound up at that point.

Mr Geraghty says one element of the current tension is that pension costs were something workers never took into account when negotiating wage rises. "Fundamentally, a pension is a deferred payment but it is one that we have taken for granted in the past," he said.

The problem for Bank of Ireland and the IBOA is one of timing. Although the Bank of Ireland proposal was put together ahead of the national agreement, it has hit the headlines as the ink dries on the accord.

The dispute is increasingly seen, particularly by unions, as a test case of the ability of Towards 2016 to deliver.

What really irks the trade union movement is that it understood the national agreement to allow time for detailed consideration of the best direction for national pensions policy.

Already a partnership pensions review has been established under the auspices of the national agreement and has held two meetings.

The Minister for Social and Family Affairs Séamus Brennan has promised a Green Paper on pensions by Easter and a White Paper in September 2007 - although that might depend on the outcome of the general election.

"The employers are seen as pre-empting the whole thing and subverting it," says Rosheen Callender, national equality secretary at Siptu and a vice-president of the Irish Congress of Trades Unions.

Ms Callender, who is also a member of the Pensions Board, which regulates the industry, adds: "What has got everyone down about the Bank of Ireland situation it that it was unnecessary because its pension fund was not in trouble as many have been in recent years.

"There was absolutely no need to Bank of Ireland to act now and no reason for it other than that they could do so."

Brendan McGinty, director of industrial relations and human resource services at Ibec, says there was never any question of employers putting a freeze on pension plan decisions until the Green Paper.

"One of the requests that the union side made was that if the Government was contemplating a Green Paper and beyond, there should be a moratorium on changes on pension arrangements in the private sector. We rejected this unambiguously."

Ibec says a failure by employers to act will simply allow pension costs to rise to an unsustainable level, ultimately jeopardising the future of the companies concerned and their employees' jobs.

"Our key message is that individuals have to take responsibility as well in trying to make provision for their own retirement," says Mr McGinty. "This is an issue that requires hard decisions."

Mercer's Tom Geraghty believes the trend away from DB schemes is not necessarily all one-way. "It is probable that, if you look five years down the road, bond yields will notch up towards historical norms, taking some pressure off the funding standards."

However, he acknowledge that pension funds will still be significantly exposed to people living longer and to rising wage levels.

For now, however, the Taoiseach's decision to wade into the dispute undoubtedly raises the stakes, coming as it does, just months ahead of an election.

Asked whether he though some companies were using the introduction of the FRS17 accounting standard as a pretext to amend scheme rules unnecessarily, he said "yes" and added that companies should be "very careful what they do because it can cause unnecessary friction".

"I don't think pension issues are affecting the viability of companies," said the Taoiseach, adding in a comment clearly directed at Bank of Ireland: "Maybe some companies could put forward that case in manufacturing but I don't think companies in very profitable areas have that difficulty."