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HR experts are cautious about new government's policy on phasing out the default retirement age

David Woods , 13 May 2010

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The coalition government's employment policies include scrapping an increase in National Insurance Contributions and phasing out the default retirement age but HR experts remain cautious about the proposed legislation.

Following the publication of the Conservative Liberal Democrat coalition agreement stating that the default retirement age will be ‘phased out', Rachel Krys, campaign director of the Employers Forum on Age (EFA), said: "The EFA is really disappointed to hear that the new government only intends to phase out the default retirement age and believes that this could be a missed opportunity to ensure that age cannot be used to arbitrarily dismiss people. The DRA is fundamentally discriminatory, based on the assumption that age affects someone's ability to do their job.

"Manifesto commitments from both parties indicated that they would remove the default retirement age and we hope that this remains one of their priorities."

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Stephanie Bird, director at the CIPD, said: "Employers will welcome the certainty that is offered by the policy programme agreed in the negotiations, and the prospect of a stable government to tackle the economic challenges Britain faces in the immediate future.

"The phased abolition of the default retirement age is a large, pragmatic step towards a goal the CIPD has called and campaigned for now for many years.  The default retirement age may encourage some managers to avoid efficient performance management of senior workers nearing retirement, and unfairly characterises all older workers as having a sell-by date.  Its abolition could have a dramatic impact on the way older workers are perceived in the workplace, and on their ability to contribute their energy and experience to delivering on the business objectives of their employers."

"We're delighted that the employers' National Insurance Contribution rise will now be scrapped.  We have argued since the policy was first proposed in the pre-Budget report in November 2009 that it may be damaging to jobs at a time when the labour market could ill-afford such risks, and employers clearly told us that the rise would lead to less job creation and more redundancies. Its reversal will bring some cheer to employers and by extension jobseekers.

"Proposals to simplify the array of welfare-to-work programmes and refer those jobseekers most in need of support immediately for help rather than asking them to wait 12 months look sensible. Today's unemployment figures highlight the scale of the challenge, and the new government has no time to waste in adding flesh to the bones of these proposals.

But she added: "We have consistently highlighted the deep concern our members have about any moves to impose an arbitrary cap on non-EU migration. This could leave many employers struggling to hire the talented performers they need to survive and thrive in the still-tentative recovery.  We note that the two parties are committed to jointly considering the mechanism for implementing the limit, and hope they will consult openly and extensively with employers before legislating or acting on this commitment."

"Although it is unclear how much room for manoeuvre the new government has on this point, we welcome the commitment to seeking to limit the application of the Working Time Directive.  Britain's flexible labour market has served employees and employers well during the recession.  Maintenance of the UK's growing flexible working culture offers the prospect of a far greater contribution to wellbeing and work-life balance than the kind of regulatory approach embodied in the Working Time Directive."

With regards to pensions the Conservative/Liberal Democrat government policy contains a number of reforms. According to Towers Watson, the commitment to review the state pension age is more significant than bringing forward the earnings link for the basic state pension by another year, that higher rate tax relief appears safe at least for now, and that the review of public sector pensions should focus on what is the most cost-effective way of rewarding public-sector employees.

The agreement says: "We will restore the earnings link for the basic state pension from April 2011 with a ‘triple guarantee' that pensions are raised by the higher of earnings, prices or 2.5%, as proposed by the Liberal Democrats."

John Ball, head of defined-benefit pensions consulting at Towers Watson, said: "During the election campaign, the Conservatives committed to restoring the earnings link in 2012. With price inflation high and earnings growth subdued, doing it a year earlier is likely to have little or no extra cost. It was ruling out the option to delay the earnings link until 2015, which removed the little fiscal leeway the new Government had. It is also hard to believe that a future government would actually have increased pensions by less than inflation in the rare circumstances when the legislation allowed it to, so the ‘triple lock' reflects what would probably have happened in practice anyway." 

The agreement also states: "The parties agree to...hold a review to set the date at which the state pension age starts to rise to 66, although it will not be sooner than 2016 for men and 2020 for women."

Ball said: "The Conservatives always said this was the tough choice that made their promise to restore the earnings link credible. 

"Before hostilities were called off, the Liberal Democrats called this an ‘attack on the state pension' that would turn retirement planning ‘upside down'. However, this is an area where politicians are used to performing U-turns even when they don't have to compromise with each other: all three parties supported a higher state pension age in the last Parliament without saying they would do so before the election. 

"Since the state pension system was last reviewed, the public finances have deteriorated and life expectancy has improved, so something has to give. If it's not going to be the value of state pensions, it will have to be the age when people start receiving them. As important as when the state pension age rises to 66, is when it rises to 67 and beyond, so we'd expect the review to cover that as well."

The Liberal Democrat manifesto proposed restricting tax relief on pension contributions to the basic rate to help pay for a higher personal allowance. In practice, this would have meant levying a 20% tax charge on the money that higher rate taxpayers or their employers pay into pensions. The agreement lists other measures that will be used to pay for a higher personal allowance, but not this.

Ball added: "Higher rate taxpayers can breathe a sigh of relief. Having spent 13 years attacking Gordon Brown for taxing pensions in his first Budget, it would have been very hard for George Osborne to do the same thing in his. There were also lots of details which the Liberal Democrats had not filled in - such as whether employer pension contributions would count as income for the purposes of determining whether someone earned enough to pay the tax and how the tax charge on final salary benefits would be calculated. This looked like a policy for opposition rather than for government and the Liberal Democrats may be secretly relieved that they don't have to implement it. 

"There is no mention of the restriction on tax relief for people with incomes above £130,000. As both parties voted for that legislation, this looks set to go ahead. The question now is whether more people will get sucked into the net each year if the thresholds are not indexed properly.

"Both coalition partners have talked about relaxing the requirement to buy an annuity and both have floated the idea that people should be allowed to access pension savings before retirement. This could lead to the justification for tax-privileged pension savings being queried in future."

And on the issue of public sector pensions, the parties have highlighted their commitment to establishing an independent commission to review the long-term affordability of public-sector pensions, while protecting accrued rights.

Towers Watson's Ball said: "No one has seriously suggested cutting the pensions promised in return for work already carried out - that would be akin to defaulting on a debt. The question is whether future promises should be as generous as those made in the past and whether we should continue to offer people in their 30s and 40s pensions that can be taken in full from the age of 60. 

"The last government got into the bizarre situation of providing its employees with very generous pensions while constantly downplaying how much they're worth, which cannot give the taxpayer value for money. The test should be whether pensions are a cost-effective way of rewarding people, not whether they allow that cost to be passed to future generations of taxpayers. When Labour's cost-sharing agreements kick in, we should get an idea of whether employees really value the current level of pension provision more than they value money in their pockets."

Ian Bell, head of the pensions group at Baker Tilly, added: "Most of these announcements are just about clawing back funds to put towards repaying the budget deficit. The policy that is most welcome is the removal of compulsory annuitisation at 75 as this should act as a catalyst for pensions saving in the future. However, it's not enough on its own to make a difference and what's needed is further policies to encourage employers to offer good quality pensions provision for their employees in the future.

"Employers with occupational pension schemes need encouragement if those schemes are to survive the introduction of NEST in a couple of years time - or will the plans for NEST alter under this coalition?"

 

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