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Retirement age review may cause DB admin headache

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  • Retirement age review may cause DB admin headache

UK - The potential removal or increase of the default retirement age (DRA) of 65 could cause "administrative wrinkles" for defined benefit (DB) schemes with different normal retirement ages.

The UK government yesterday revealed it would bring forward a review of the DRA, introduced in 2006 under age discrimination rules, in an effort to "respond to the changing demographic and economic circumstances".

The review was originally scheduled for 2011 but Angela Eagle, minister for pensions and the ageing society, said: "It is time to look again at this. Some people prefer to take early retirement, others prefer to keep working. We want to give older people flexible retirement options."

Under the existing rules, employers cannot force staff to retire below the age of 65 except in specific circumstances related to their job. But while the majority of people still want to retire before 65 the government revealed 1.3 million people choose to work beyond the state age, with even more saying they would do so if allowed by their employer.

Dr Deborah Cooper, head of the retirement resource group at Mercer, pointed out that defined benefit schemes were exempted from certain aspects of the age discrimination rules, because of the complexities of pensions, and allowed to keep normal retirement ages to make it easier to administer the scheme.

That said, she warned if the results of the review mean employers do not normally retire people at 65 then it will "look a bit odd" if the pension scheme has a lower retirement age and cause some "adminsitrative wrinkles" which might force employers "to look at the design of their pension schemes".

Cooper pointed out this then creates a problem because although trustees would be able to look at changing retirement dates for future accrual, it cannot alter dates for accrued benefits unless the government changes the legislation so "it does not mean schemes could put off paying accrued pension benefits".

In relation to defined contribution (DC) schemes, Cooper argued the actual payment age does not matter that much as members receive a pot of money to buy an annuity, so it could in fact improve flexibility for members as "if retirement ages go up then the employer is likely to let you contribute for longer so the member accrues a bigger pension".

She admitted, however, that with DB schemes changes to the DRA would highlight "the disconnect between scheme retirement ages and the employers' retirement age which does create some administrative complexities" and would be a "bit of a headache".

Faith Dickson, partner at law firm Sacker & Partners LLP, added the decision to accelerate the review process was not much of a surprise as "the government is presumably weighing up the arguments it is going to use in the UK courts in the Age Concern case about why an age 65 default retirement is justified for discrimination law purposes". (See earlier IPE article: ECJ passes Heyday case back to UK High Court)

She argued there is a "fine balance" between making sure people are not forced to retire sooner than they want to, and providing employers with some certainty about managing their employees and allowing young people to enter the workforce.

But Dickson added: "Since pension schemes currently enjoy a number of exceptions from the general principles of the anti-age discrimination legislation, those of us in the pensions world can only hope that this doesn't become the first in a long line of reviews of the exceptions that apply under the legislation."
 
John Ball, head of DB pension consulting at Watson Wyatt, noted one in 10 men over 65 are still in work and claimed "this number was rising sharply until the recession stopped even the biggest employment growth areas in their tracks".
 
At the same time, however, he pointed out "while there are people who want to carry on working beyond retirement age, "more will do it for money than for love", so in the long-term "this could make employers more willing to provide good quality pensions and more nervous about taking on older workers who have little by way of pension provision from their previous employers". 

The consultation on the government's strategy for "Building a society for all ages", closes on 12 October 2009.
 
If you have any comments you would like to add to this or any other story, contact Nyree Stewart on + 44 (0)20 7261 4618 or email nyree.stewart@ipe.com

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