Since age discrimination legislation came into force on 1st December 2006, employers who sponsor pension schemes with normal retirement ages below 65 have had to allow some form of pension accrual to continue for members who keep working beyond their pension scheme’s normal retirement age. The fact that employers could cease an employee’s service at the default retirement age of 65 meant that employers had some control over the longstop date for such benefit provision should they wish to cease it.
However, the ability for employers to be able to give an employee notice to retire at age 65 (based purely on the fact that the employee has reached that age) was removed earlier this year.
As that long stop no longer exists, this will naturally mean that more employees will take ‘late retirement’ and employees will need to be allowed to continue pension accrual in some form until employment ceases.
In terms of what pension benefits those members should be offered, there has been a lot of speculation by commentators. The question applies both in terms of the treatment of their benefits accrued before their normal retirement date (for example, in a defined benefit scheme, through continued final salary linkage, application of a late retirement factor, or the greater of either of these) and in terms of continued benefit accrual after normal retirement date (by continued accrual in the same scheme, or through providing accrual in another scheme after normal retirement date). There is no clear cut answer and employers and trustees need to continue to consider the options and test whether the preferred ways of dealing with this issue represent a reasonable response to the legislative requirements
Insurance’ related benefits
One area that has been brought into focus by the removal of the default retirement age is the issue of the continued provision of insured benefits. This has been a key area for employers as the increased risk of insurers having to pay out for older workers (through a higher chance of, for example, death or ill health) means that insurance for those older workers can be more expensive.
To deal with this, the Government introduced an exemption to the abolition of the default retirement age meaning that employers can stop the provision of insurance at age 65 (or at state pension age when this becomes higher than 65). However, this exemption has been narrowly drafted. This means that it has been widely interpreted as not being flexible enough to allow pension schemes to stop providing insurance type benefits (such as death in service lump sum cover) at age 65, even if the Government had intended this to be allowed.