The changes

Under the Pensions Bill 2011, the state pension age for women will rise to age 65 by November 2018. The state pension age for men and women will then increase to age 66 by April 2020, with further increases in the pipeline after that.

The issue

The changes will impact on DB schemes that provide for early retirement bridging pensions (i.e. where an early retirement pension is automatically enhanced until state pension age) or other flexible pension options under which a member taking early retirement can request his early retirement pension to be increased from his retirement date until state pension age, and correspondingly reduced thereafter. Depending on how a scheme's rules are interpreted, the increased pension may be payable until (1) an age that was fixed when the election was made or (2) an age that will float with the change in state pension age. If the former applies, the member may suffer financial hardship if the pension reduces before he reaches his revised state pension age. If the latter applies, there will be a funding strain on the scheme if the pension increase or reduction was calculated by reference to the original state pension age and not the revised one.

On the flip-side, there will be issues for schemes which allow members to elect to receive a reduced early retirement pension until state pension age with a correspondingly increased pension given from state pension age.

Next steps

Employers and trustees should consider whether their scheme rules need to be amended to reflect the increases in state pension age, and whether some form of adjustment mechanism for pensions in payment is desirable in order to avoid these problems.