There has been a huge amount of discussion and debate on this matter, mainly focusing on how employers should deal with an aging workforce going forward. The pensions implications of the abolition of the default retirement age appear to have taken a backseat, however this is also something which employers will have to consider.
Employers that operate an occupational pension scheme will need to consider the impact of the abolition of the DRA on how they operate their scheme, as occupational pension schemes invariably specify a normal retirement age (NRA), which is usually 65, from which members can expect to be entitled to take their benefits.
It may initially seem as though the impact will be minimal, as the exemption specified in the Equality Act (Age Exceptions for Pension Schemes) Order 2010 that an NRA can be used as a reference point for the calculation of benefits will remain in place despite the abolition of the default retirement age. As such, schemes will not have to remove their NRA. Additionally, schemes can continue to restrict admission to an occupational scheme by reference to a maximum age, use age criteria in actuarial calculations, and (in certain circumstances) operate age-related contributions.
It was perhaps in light of this that the Department for Business, Innovation and Skills made its statement that "The absence of a DRA does not affect the setting of a 'normal retirement age' or 'normal pension age' for the purposes of occupational pension schemes". This is strictly true, and as such employers could be forgiven for thinking that pensions are not an issue that they will have to address in light of the recent changes.
However, the position is, of course, not quite as simple as that.
As employees can no longer be required to retire at the age of 65, employers will need to ensure that they allow pension scheme members to continue to receive pension benefits once they are over the scheme's NRA. Otherwise, this could be construed as age discrimination, unless it can be objectively justified.
In particular, employers who operate occupational pension schemes will need to review their approach to late retirement.
Defined benefit schemes typically adopt one of two approaches to working past NRA:
- either they continue to allow accrual; or
- accrual ceases and the pension becomes deferred (typically then being increased for late payment).
In some cases, an employee with significant periods of pensionable service might actually be better off with option 2, rather than continuing to accrue benefits. However, this will by no means be the case for all members, and an employee who was denied the ability to continue accruing could potentially make a claim of age discrimination.
But requiring all members to take option one by removing the ability to cease accrual at NRA (and get a pension uplifted for late payment) may in some cases amount to the removal of an accrued right or entitlement, which is prohibited under section 67 of the Pensions Act 1995.
As such, care is needed when considering how to ensure that pension provision post NRA does not breach the age discrimination legislation.
Defined contribution schemes should be less problematic for members who wish to work past NRA, although the trustees of defined contribution pension schemes will need to consider whether their investments options remain appropriate. As members approach retirement their pension pots are typically invested on their behalf under a "lifestyle" option, which involves moving from equities towards bonds and other low risk investments. If retirement age is unpredictable it will become harder to time this gradual move towards less volatile investments, and it will therefore become more important to communicate with members to ensure the trustees are aware of their plans and can tailor their investment strategy accordingly.
The main implication for employees is the role that their level of pension provision will take in their decision on when to retire. As such, one way in which employers may be able to encourage employees to consider their retirement arrangements is to facilitate access to advice on financial planning on retirement.
Employers should be careful when discussing retirement plans with employees. If an employer only holds such discussions with, or gives access to financial planning advice to, employees of a certain age, this will likely be age discrimination. Employers would therefore be wise to hold general conversations with all employees regarding future plans, regardless of age, to help minimise the risk of allegations of discrimination.
Gemma Hay is a Solicitor in the employment team and Gale Gilmore is a solicitor in pensions team at UK law firm Dundas & Wilson
