Default retirement age to go: what will be the effect on benefits?

If you read nothing else, read this…

• With no DRA, employers will not be able to forcibly retire someone unless it can be objectively justified.
• There is an exemption for employers that currently offer group risk benefits.
• An employer could provide group income protection to staff above state pension age for a limited term.
• Employers will also need to review their pension arrangements.

Case study: University of Lincoln studies implications for benefits

The University of Lincoln has 1,300 staff, 30% of them aged over 50. The organisation is reviewing its benefits package to account for any impact of the removal of the default retirement age.†

Ian Hodson, reward and benefits manager at the university, says: “I see the removal of the DRA in two ways. Firstly, it means we have commenced a review of policies, contracts and processes to remove any aspects relative to the DRA, and developed communications and guidance for staff and managers.

“Secondly, the removal has given us the opportunity to focus on some of other agendas within the organisation to
ensure they are fit for purpose.”

The university is reviewing its benefits package to take into account what, over time, could be a changing workforce demographic. It is also trying to focus on management information. “For example, we are aware of a higher long-term absence rate within the over-50 age group and are looking at how our health plans could support this,” says Hodson.

The university is also reviewing how its pre-retirement support could be adapted as the concept of retirement at a fixed age is phased out.

“We will be promoting the benefits of phased and flexible retirement to graduate the move into retirement, while still maintaining the critical links our employees have with the university,” says Hodson.

Case study: Nationwide embraces diversity

About 13% of Nationwide Building Society’s staff are aged over 50. It introduced flexible retirement to age 75 in 2005, ensuring benefits that were applicable before the normal retirement age applied if an employee stayed on after 65.

Nationwide extended the benefits that were available to age 75 and self-insured benefits beyond the age of 75, if staff wanted to continue working.

In light of the removal of the default retirement age, the Nationwide Group has decided not to operate a retirement age, but is reviewing what that will mean to various divisions.

Antonia Humphreys, senior employee relations consultant at Nationwide, says: “It is very important that we embrace diversity within our employee base, and when we moved to flexible retirement in 2005, one of the drivers was that our customers really wanted to do business with a workforce that reflected themselves.”

Employers are having to come to grips with the impact on their benefits of the removal of the default retirement age, says Tynan Barton

Figures from the Office for National Statistics for the last quarter of 2010 show the UK has 874,000 people over the age of 65 in employment – an increase of 104,000 from the previous year.

In January, the government confirmed that the default retirement age (DRA) will be phased out between 6 April and 1 October 2011. This means employers will not be able to forcibly retire an employee, using the DRA procedure, once they reach 65.

The government has declared that there will be an age exemption for group risk benefits, such as income protection, life assurance, sickness and accident insurance, including private medical insurance. This will allow employers to cover staff to a terminal age of 65 or the state pension age, whichever is the greater, as the state pension age gradually increases to 68.

With no DRA, operating insured benefits for an ageing workforce could become more expensive. Alan Beazley, advice and policy specialist at the Employers Forum on Age, says: “Most policies, particularly group income protection, are written on the basis that there is a terminal age. Without being able to fix an age, you cannot write the risk.”

If an employer could not cap the age to which it provides such benefits, the price would start to escalate to a point where some organisations might be forced to withdraw the benefits for all staff. Nick Homer, group risk development manager at Zurich UK Life, says: “If employers have to provide the same thing to everyone and it is non-compulsory, the easiest thing would be to not give it to anyone, which would be a disaster for most employees, employers and providers.”

Jamie Winter, senior consultant at Towers Watson, adds: “If there was no exemption, then effectively you have created lifetime cover, which is exceedingly expensive. The nightmare scenario is that if there was no exemption, group income protection schemes could be removed entirely, or radically redesigned to try to make them affordable.”

Choose a sensible strategy

Limited-term group income protection, with the benefit payable for a maximum period of two, three or five years, could be a sensible strategy. James Walker, technical director at Legal and General, says: “If employers choose to provide cover to staff above state pension age, they need to be fair in doing so. Providing benefits on a limited-term basis can be a way to save premiums.”

The exemption currently refers only to group insured benefits, which raises the issue of what happens with self-insured benefits. “We think there will still be employers that do not use a third-party insured arrangement, but self-insure, that may not qualify for the exemption,” says the Employers Forum’s Beazley. “We would hope to continue discussions with the government to rectify that.”

The DRA’s removal requires employers to examine their benefits to see whether eligibility criteria and the extent of cover are fit for purpose, says Renu Birla, director, people services at KPMG. “It may not mean significant change,” she says. “It is more about making staff aware that they need to work with their employer to ensure they can continue to add value and enjoy working.”

Share schemes will also be affected by the change because they often refer to a specific retirement age. HM Revenue and Customs-(HMRC) approved company share option plans (Csops), share incentive plans (Sips) and sharesave schemes have minimum retirement ages of 55, 50 and 60, but a higher age can be specified. Any changes to an approved share scheme are likely to need HMRC approval. For unapproved schemes, if an employer decides to remove a retirement age referred to in the plan, the scheme rules will need to be changed. “For share schemes, retirement may have been a leaver event, and employers will now need to think about how they are going to treat that event,” says Birla.

To cope with an older workforce, employers must liaise with staff to ensure they save enough for retirement. Martin Palmer, head of corporate pensions marketing at Friends Provident, says: “We have a lot more options now. We can work longer, we can work later, we can put more money in at different stages of our lifetime and we have different types of savings vehicles. The reality is, people will have to work into their late 60s unless they do something about it.”

No need for further changes

In the government’s response to the consultation on removing the DRA, it said it saw no need for further changes in the regulations on pensions, but employers will have to adapt their schemes to the new landscape. “They will need to make sure they are in line on age discrimination, making sure that where workers are continuing post-65, or post the scheme’s pensionable age, that they continue to provide means for accrual,” says Beazley.

Pensions will have to adapt according to the type of scheme, the employer and the workforce. Georgina Jones, associate at Sacker and Partners, says: “Scheme design, particularly the older occupational defined benefit and defined contribution schemes, are premised on people retiring around 65.”

In future, more people may take flexible retirement, working past a scheme’s normal retirement age, but wanting to draw some, or all, of their benefits at the same time.

Zurich’s Homer adds: “Employers need to ask, what is the approach we need to take? What do we think our workforce will value the most, and what gives us greater clarity on the cost of providing these benefits?”

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