In 2014, the age at which a person can receive a state pension is set to increase from 65 to 66. By the year 2028, it is planned that the state pension age will have risen to 68. This proposal creates a number of problems for individuals, employers and pension funds.

ALTHOUGH all employees are required by law to be given details of their terms and conditions of employment, not everyone has a written contract that specifies the age at which they are to retire. This is usually described as their normal retirement date and mostly it ranges between the ages of 60 and 65. For others, their employment contract may be silent as to the age at which they will retire. And some employees may have no written contract or collective bargaining agreement, but are expected to retire in accordance with the custom and practice operated in the workforce.

Under current employment law, generally, any change to a fundamental term of employment, such as increasing a person’s normal retirement age, would require the employee’s written agreement.

There is also the thorny issue of age discrimination to consider. The Employment Equality Acts 1998-2007 state that it is not discrimination on, age grounds, to fix different retirement ages for employees, although it appears that this blanket exception may not reflect overriding European law.

Implications of changing pension age

Where an employee has a normal retirement age set out in their contract predating the age at which the 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 amending legislation to ensure 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 those being retired on reaching an age earlier than state pension would qualify for statutory redundancy benefits.

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 unless overriding law is introduced, the trustees 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 draw down their pension on the same basis that they had been expecting to draw it down before the change in the pension age was announced. These people ought not to be penalised under an occupational scheme’s rules. In other words, it would seem to be fair to enable such people to draw down their pensions at their choice of retirement age – the previous one or the new one, in the case of members of defined benefit schemes – without suffering an unfair actuarial reduction. Thus, on a transitional basis, it seems reasonable enough to offer employees the option of retiring from their employment and drawing down their 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.

The question arises then: should such a policy be implemented on a case-by-case basis by employers and trustees of pension schemes or should it be enshrined in a more flexible system by law?

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 (such as death-in-service or disability benefits). 
  • There is likely to be a considerable additional administrative 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 the scheme pension coupled with the state pension would represent a certain portion of final pensionable earnings. This is a common enough scheme design which is predicated on the basis that the normal pension date for employment purposes would be near enough to the time when the state pension is paid. Apart from the prospect of a future timing mismatch between the date on which the scheme and state pensions will come into payment, there is also the possibility that the 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 draw down their pension benefits will be the age that prevailed at the time they retired. 
  • 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 the employer? Flexible retirement ages are likely to cause greater expense to the scheme and its sponsors: for example, when implementing financial modelling as there will be a requirement to assume different scenarios.
  • There may also be a practical need to 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 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 raise implications for Revenue limits, tax relief and other matters.