Employers will need to consider the impact of the change in state pension age on their HR policy and occupational pension schemes, writes Aisling Kennedy
Legislation enacted in Ireland during 2011 will increase the age at which the state pension is payable to 66 in 2014, 67 in 2021 and 68 in 2028. Anyone born after 1960 will be entitled to the state pension aged 68.
Most individuals will regard the deferment of the state pension as an unwelcome development, but it is a necessary one given increasing life expectancy. By way of example, men reaching age 65 in Ireland today are expected to live 22 years on average, women 24 years.
At present, the state pension is actually payable from age 66 but social insurance contributors who are no longer employed can claim a "transition pension" between ages 65 and 66. In practice, most people currently receive the state pension from age 65. The transition pension will not be available to anyone reaching age 65 on or after 1 January 2014. This will result in a standard state pension age of 66 for both the contributory and non-contributory state pensions.
This change was flagged in the National Pensions Framework published in March 2010 and was one of the commitments given in relation to the EU/IMF Programme of Financial Support for Ireland. Perhaps, because it had been signalled well in advance, media and public reaction to the Social Welfare and Pensions Act 2011 was muted. Attention to the issue is, however, likely to increase as 2014 approaches.
Those born in 1949 will be the first affected. They will have to wait until 66 to draw down a pension. If their employment ceases at age 65, they may be able to claim jobseeker's benefit for up to 12 months. However, the maximum rate of jobseeker's benefit, currently €188 per week, is less than the contributory state pension, currently €230 per week. Individuals must also be available for, and actively seeking, employment to qualify for this benefit.
The impact will be even greater for those born between 1955 and 1960, who will not be entitled to the state pension until age 67. There will be no new recipients of the state pension in 2021, likewise, there will be no new recipients of the state pension in 2028.
Perhaps surprisingly, there has been no discussion in Ireland of any change to employment law to require employers to allow employees to continue to work until the age at which they qualify for a state pension (the Employment Equality Act 1998 provides that Irish employers may set a compulsory retirement age of their choosing for their employees). This is in contrast to the UK, where the default retirement age of 65 has been abolished. Nevertheless, it may be difficult for employers to continue to impose a standard compulsory retirement age of 65 when the state pension age increases.
It should also be noted that the Employment Equality Act 1998 conflicts with the prohibition on age discrimination in the EU Framework Directive on Equal Treatment, 2000. The Directive permits different treatment of workers based on age only so long as that treatment is "objectively and reasonably justified by a legitimate aim and the means of achieving that aim are appropriate and necessary." The impact of this provision is somewhat unclear arising from recent case law from the European Court.
In October 2011, Mercer surveyed Irish employers on their proposed response to the increase in the state pension age. A s can be seen from the chart, the majority had not yet made any decision in this regard. Only a small minority has decided to increase the contractual age at which employment terminates to match the increase in the state pension age.
Over time, it is likely that employers will face increasing pressure to allow older workers to remain in employment until they qualify for a state pension, as many workers will be unable to afford to retire sooner. The government has expressed its intention to encourage employers and employees to change their attitudes to working longer.
In the meantime, employers will need to consider the impact of the change in state pension age on their occupational pension schemes, particularly defined benefit schemes. Most schemes are integrated with the state pension, ie, pensionable salary is salary less an offset in respect of the state pension. Members of such schemes expect their aggregate retirement income to come from two sources: state and company pension. However, between age 65 and the new state pension age, they will receive only their company pension.
Employers may come under pressure to provide a temporary supplement until the state pension comes into effect. In some schemes, where the normal retirement age is less than 65, such supplements, typically known as "bridging pensions", are already payable. The wording of the trust deed and rules may specify either that the supplement is payable until age 65 or until state pension age. In the latter case, the supplement will automatically be extended until the new state pension age. Employers and trustees should review the precise terms of their own schemes to ensure that any implications of the change in state pension age are identified and addressed.
Many Irish employers are considering changes to DB pension schemes in the context of recovery plans to address funding deficits during the latter part of this year. The change in the state pension age presents the opportunity to make a similar change to a defined benefit scheme's normal retirement age (NRA), to help generate cost savings.
For DC schemes, a change to the NRA would be relatively straightforward.
Any such proposal will, however, require careful consideration as regards the implications for workforce management of retaining employees until ages 66 to 68. The additional cost of life assurance and disability cover, and the higher prevalence of illness and unplanned leave, at these ages will also require consideration.
Aisling Kennedy is principal at Mercer in Dublin