Almost six months into the post-‘Age day’ era, and it is hard for anyone involved in the pensions industry not to feel at least a little weary when reading the words ‘age discrimination’ and ‘pensions’ in the same sentence. Whilst many of the doubts and concerns expressed last year in the run up to the Employment Equality (Age) Regulations 2006 (the Age Regulations) coming into force have been resolved, there are some particularly nagging issues still haunting the trustees, sponsoring employers and advisers of many of the UK’s pension schemes. The areas of most concern relate to the benefits which members should be given if they remain in service beyond a scheme’s normal retirement date (NRD), and the sometimes related issue of whether members should be allowed to draw benefits whilst remaining in service ie flexible retirement.
The late retirement issue is of particular concern if a scheme’s NRD is below age 65 because, as of 1 December 2006, employees generally have the right to stay in service until the new ‘default retirement age’ of 65. Nevertheless the issue applies whatever the scheme’s NRD. The concern is that refusal to permit the member to continue to accrue pension benefits whilst remaining in service could (and according to an earlier version of the DTI’s pensions and age guidance which was subsequently withdrawn, would) amount to age discrimination. There is a broad spectrum of possible responses to this problem, ranging from the ‘do nothing’ approach at one extreme to the ‘belt and braces’ approach at the other, with various shades of grey in between.
The ‘do nothing’ or ‘wait and see’ approach is risky but has the advantage that it avoids the need for rule amendments which could subsequently turn out not to have been necessary or appropriate eg following further guidance from the Government or (eventually) following judgments of a tribunal or court on the point. A ‘belt and braces’ approach would involve, for example, the provision of a late retirement factor (LRF) on those of a member’s benefits which relate to pre-NRD service, in addition to allowing the member to begin a new period of pensionable service from NRD onwards. This is the approach which seems most closely to replicate the pre-NRD position, but, leaving aside the complexities of implementing it from a legal and administrative perspective, it is possible that this approach could go beyond what the anti-discrimination legislation actually requires and should therefore be treated with a degree of caution.
The ‘shades of grey’ approaches would involve, for example, allowing an LRF on benefits relating to pre-NRD service but preventing future accrual, or allowing continued accrual but no LRF for pre-NRD service. However, the situation is complicated by the fact that for any given member, depending on his length of service, the value of continued accrual may be more or less than the value of applying an LRF.
Against this confusing backdrop, it is encouraging to see that the pensions industry has nevertheless grasped the nettle that is age discrimination and pensions, and – in the absence of any relevant guidance on the point – is trying to deal with the problem in a practical and constructive way.
In its two-part survey on late and flexible retirement (see March and April 2007 editions), Occupational Pensions spoke to 71 schemes (including final salary, money purchase, career-average and hybrid schemes) about their policies, if any, on accrual beyond NRD, life cover for older workers, benefit enhancement for late retirees and flexible retirement options. The survey was carried out in November/December 2006 and whilst many schemes were taking a ‘wait and see’ approach in the hope of guidance from the Government in due course, some schemes have clearly taken a view on how best to proceed.
The majority of the schemes surveyed either already had or are moving to an NRD of 65, and many of the schemes allow members to work beyond NRD and continue to accrue benefits in the same or an alternative scheme. Just over half the schemes surveyed provide life cover through the scheme for members in service beyond NRD subject to a maximum age ranging from 63 to 75, with a number of others either providing cover separately or considering introducing continued life cover in the near future. Fewer than half the schemes provided enhanced benefits post-NRD, although again this is an area under review for many schemes.
Perhaps surprisingly, 70% of the schemes surveyed permit members to draw a pension while continuing to work subject to a minimum age which ranges from 50 to 65, with a number of others actively considering introducing such an option. However, most of those schemes offer fl exible retirement to members on a one-off basis ie requiring the member to take all his pension in full at the outset, rather than on a phased basis. The complexity of administering such a phased retirement policy is clearly dissuading many employers from going down this route. Only a minority of schemes allow members to accrue benefi ts in the same scheme whilst drawing a pension, although a number of schemes do permit such continued accrual in an alternative arrangement eg a DC scheme, stakeholder or GPP.
If any general conclusion can be drawn from the experience of schemes and their advisers over the last fi ve or so months since the coming into force of the Age Regulations, it seems to be that trustees and employers have generally responded well to the need to eliminate age discrimination in their schemes where the law has been suffi ciently clear to enable them to do so. But the lack of clarity in certain areas is leading to inactivity and paralysis in some schemes where the fear of taking inappropriate decisions and making unnecessary scheme amendments is proving hard to conquer.
Furthermore, whilst schemes welcome the potential for greater fl exibility introduced by the Finance Act 2004, many of them are being held back by lack of clear information or guidance on how that fl exibility might actually work in practice and the implications of the age legislation on any fl exible retirement policy. It remains to be seen if (and, if so, when) the DWP’s pledge, made in a letter to the pensions industry back in January this year ‘to examine whether it is possible to provide greater certainty where fl exible retirement and pensions is concerned’ will come to fruition. We continue to hope fervently that it will.