Pensions without the default retirement age – time to make a change?

Introduction

With the default retirement age (DRA) gone1, where does this leave occupational pension schemes? The Government might believe the change has “no impact”2 on schemes but, in practice, the DRA’s removal is already being felt.

Key points

Employers and trustees need to consider whether and, if so, how to adapt their pension arrangements to fit in with the new employment landscape.
Employers are likely to come under more pressure to permit flexible retirement.
An exemption which allows group risk insured benefits3 to be withdrawn from the greater of age 65 and SPA does not specifically cover such benefits if they are provided under an occupational pension scheme.

Background

The DRA was introduced as part of the age discrimination legislation in 2006.4Provided they followed a set procedure, it allowed employers to compulsorily retire an employee at the age of 65 or over.
The DRA fitted in with the classic benefit structure of an occupational pension scheme under which benefits were payable, in full, from age 65.

Impact on pension schemes

The good news is that the absence of a DRA does not affect the setting of an NRA for the purposes of a scheme. Under an exception to the age discrimination legislation, it remains lawful for pension schemes to stipulate an age at which a member becomes entitled to their benefits and below and above which an actuarial reduction or uplift (respectively) might apply.5

The bad news is that schemes are still faced with a lot of questions, including:

what benefits should be offered to those who work beyond NRA? and
should the scheme offer flexible retirement and, if so, how?

Benefits beyond NRA?

What to offer to people who work beyond NRA is a benefit design issue. However, the basic position is that such employees should be entitled to continue to accrue benefits on the same basis as those who are still below NRA. The removal of some or all benefits from members above a certain age is likely to amount to direct age discrimination.

Unlike other areas of discrimination law, it is possible to objectively justify direct as well as indirect age discrimination (as a proportionate means of achieving a legitimate aim). However, cost alone is not generally considered a sufficient justification.

Insured benefits

The Government has introduced an exception to the age discrimination legislation6 to allow group risk benefits to be withdrawn from employees at the greater of age 65 or SPA. Unfortunately, this exemption is so narrowly drawn it does not specifically cover such benefits if they are provided under an occupational pension scheme. Employers may therefore wish to consider providing such benefits through a separate insurance policy in order to gain its protection.

Flexible Retirement?

Since A-Day (6 April 2006), HMRC has permitted most pension scheme members to draw some or all of their pension benefits while remaining in service with their employer. However, not all employers have opted to permit flexible retirement.

The removal of the DRA, together with the Government’s apparent desire for individuals to be able to dictate the timing and pace of their retirement, is likely to lead to an increased demand for this option. Employers and trustees should consider acting now to put a policy on flexible retirement in place. Dealing with requests on an ad hoc individual basis is more likely to lead to inconsistencies and possible complaints of unequal treatment.

Action

Employers and trustees need to make long-term decisions about running their schemes in a “DRA-less” world in which scheme members will not all expect to retire at the same age.

1 Please see our Alert “The bell tolls for the default retirement age” dated 17 January 2011
2 “Phasing Out The Default Retirement Age : Government Response To Consultation” dated January 2011
3 For example, income protection, life assurance, sickness and accident insurance, including private medical cover
4 The Employment Equality (Age) Regulations 2006
5 Paragraph 11 of Schedule 1 to the Equality Act (Age Exceptions for Pension Schemes) Order 2010
6 Paragraph 14 of Schedule 9 to the Equality Act 2010