This article was first published in the Summer 2011 issue of Irish Pensions Magazine, a publication of the IAPF, the Irish Association of Pension Funds.
The National Pensions Framework published in March 2010 indicates that the State Pension Age will be increased gradually to 68 years. In 2014 State Pension Age will move from 65 to 66. It will then be increased to 67 in 2021 and 68 in 2028.
This proposal creates a number of uncertainties for individuals and employers. It involves employment issues as well as structural points affecting pension scheme design, and will impact on trustee powers and obligations under occupational pension schemes as well as having knock-on implications for current Revenue Rules. Solutions to these uncertainties will need to avoid breaching employment protection laws dealing with age and disability discrimination.
This article touches on some of the big picture points which are likely to be relevant and considers some issues and possible solutions. It is clear that these issues are gaining momentum as is evidenced below from a recent exchange in Dail Eireann.
A question posed by Sandra McLennan TD to the Minister for Social Protection, Joan Burton, in May 2011, sought the Minister's views on her decision to raise the age for the State Pension and suggested that this decision will disproportionately affect those on low and irregular incomes who do not have access to a private or occupational pension or savings.
A written answer from the Minister:
"Given the changes to State pension age and the other proposals in the Framework, both employees and employers must be encouraged to change their attitudes to working longer. In the workplace, employers must seek to retain older employees and create working conditions which will make working longer both attractive and feasible for the older worker. Where this is not possible and people leave paid employment before State pension age, they will be entitled to apply for another social welfare payment until they become eligible for a State pension, as is the current situation."
Employment Law Issues
At present, although all employees are required by law  to be given details of their terms and conditions of employment only some employees have a written employment contract which they have signed and which specifies the age at which they are to retire. This is usually described as their normal retirement date. Mostly it ranges between age 60 and 65. Some individuals continue to work after they have reached the age at which they are contractually bound to retire.
For others their employment contract may be silent as to the age at which they will retire. Others, again, may have no written contract or collective bargaining agreement, but are expected to retire in accordance with custom and practice operated in the workforce.
As a matter of employment law and subject to any overriding law to the contrary, any change to a fundamental term of employment such as normal retirement age would require the employee's written agreement.
Pension Scheme Benefit Design
At present pension scheme provision in Ireland is not mandatory and many employees are not provided with any pension arrangement by their employer and rely on State Pension as their sole income when they retire. It can also be the case that there is a defined benefit integrated pension scheme in place which will supplement the basic State Pension of its members. The amount of the supplement will vary from pension scheme to pension scheme and can be generous or quite small depending upon the facts. Increasingly, many workers (particularly younger workers) have to rely on a defined contribution arrangement and they will not know until the time they retire how much income their pension savings will generate for them when they retire.
Normal Retirement Ages
There is also the thorny issue of age discrimination to consider. The Employment Equality Acts 1998-2007 (under which Ireland implemented Directive 2000/78 which establishes a general framework for equal treatment in employment and occupation and also prohibits age discrimination, subject to certain exceptions) state that it is not discrimination on the age ground to fix different ages for retirement (whether voluntarily or compulsory) of employees of any class or description of employees. It appears that this blanket exception does not reflect overriding European law, but the law in this area is somewhat unclear arising from recent case law from the European Court. Consequently, Ireland may be required, within the context of its national law, to enable employers impose compulsory retirement ages on objectively justifiable grounds within the context of legitimate social policy aims. When considering how Ireland will operate compliant normal retirement ages, in a way that does not discriminate against individuals on age grounds, it may be helpful to understand some of the practical issues that are highlighted by the proposed changes in State Pension Age.
Some Implications of Changing the State Pension Age
Where an employee has a contractual normal retirement age, which predates the age at which State Pension can be drawn, subject to compliance with age discrimination laws, employers are not required to retain the employee until the date on which he or she is able to draw down State Pension. If the retired employee does not have savings or another pension arrangement on which they can reasonably live at the time of their contractual retirement age, they may be destitute from the time of their retirement until State pension comes into payment.
Remedies to this potential issue could, perhaps, be provided through amendments to either or both of the Unfair Dismissals Acts 1997 to 2007, and the Redundancy Payments Acts 1967 to 2007. For example, the Unfair Dismissal Acts could be amended so that any termination arising solely because of a person reaching an age earlier than State Pension age would constitute an unfair dismissal unless this could be objectively justified. Equally, the Redundancy Payments legislation could be amended so that persons being retired on reaching an age earlier than State Pension would qualify for statutory redundancy benefits. Perhaps changes to either or both of these laws are what the Minister for Social Protection is contemplating.
That said, would it be desirable, within the constraints of EU law, to enable the dovetailing of normal retirement age for employment law purposes and the age at which pension is usually drawn down in the individual's occupational pension scheme? This also has implications for the terms of the governing trust documents and rules since trustees are only permitted to pay benefits set out in the scheme's rules. Consequently, unless a scheme is amended to enable members retire at State Pension age or overriding law is introduced, the trustees will be required to pay benefits in accordance with the terms of the rules.
If normal retirement age for employment law purposes is to be raised to reflect the State Pension Age, some individuals may wish to leave service early and drawn down pension on the basis that they had been expecting up until the recent announcement of the change in State Pension Age. These individuals ought not to be penalised under the occupational scheme's rules. In other words, it would seem to be fair to enable such individuals drawn down their pension at their choice of retirement age, i.e. the previous one or the new one, in the case of members of defined benefit schemes, without suffering an unfair actuarial reduction if they choose to drawn down pension at their previous normal retirement date. Thus, on a transitional basis, it seems reasonable enough to enable employees the option of retiring from their employment and drawing down pension at their previous normal retirement date in the knowledge that they will have to wait for a few years before they can draw down their State Pension.
Should such a policy be implemented, on a case by case basis, by employers and trustees of pension schemes or ought overriding flexibility be introduced at national law level?
Other points that are relevant to the higher retirement ages in prospect include the following:
- It is likely that unless there is explicit overriding law to the contrary, insurers will charge higher premiums for those older employees in respect of which an employer is insuring risk benefits (e.g. death-in-service or disability benefits).
- There is likely to be a considerable additional administration burden, particularly on defined benefit schemes, to work through how these changes will operate in practice. For example, many defined benefit schemes operated an integrated benefit structure whereby the amount of retirement pension is calculated on the basis that scheme pension coupled with Sate Pension will represent a certain portion of final pensionable earnings. This is a common enough scheme design which is predicated on the basis that normal pension date for employment purposes would be near enough to the time when Sate Pension comes into payment. Apart from the prospect of a future timing mismatch between the date on which scheme and State pensions will come into payment, there is also the possibility that rules themselves may not adequately separate the State and scheme elements so that, inadvertently, future changes to the date when State pension becomes payable may have adverse implications for the scheme itself and the benefits that it is obliged to provide. This is an issue which ought to be checked out sooner rather than later by reviewing the scheme's rules and key definitions. Where necessary, corrective action may be required.
- There may be issues for members of a pension scheme who have left service with their entitlements retained within the scheme. Presumably, the normal retirement age at which they will be able to drawn down their pension benefits will be the age that prevailed at the time they left service.
- It may be that the outcomes will result in schemes having to permit flexible retirement ages for their members. Who will have the freedom to choose the retirement age? Will it be the individual or will it be the employer. The possibilities of flexible normal retirement ages is likely to cause more expense for the scheme and its sponsors, for example, when implementing financial modelling as there will be a requirement to assume different scenarios. This is relevant to the production of projected benefit statements with break downs of the likely projected pension at normal retirement age.
- There is also the possibility that there may be a practical need to a benchmark salaries for those who choose to work up to the later retirement ages. Employers are unlikely to want to have to pay higher salaries to older workers where they would be able to replace those workers with less experienced (younger) people on lower salaries who are capable of carrying out the same or substantially the same work. Benchmarking may have age discrimination implications even though some older workers may be quite prepared to stay in the workforce and work for less. Flexible retirement ages also raises implications for Revenue limits, tax relief and other matters.