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Increasing state pension age
How will you cope?
The Government some time ago legislated for changes to the age at which eligible individuals are to receive a state pension and these changes will have effect from 1 January 2014.
These changes are:
- The State Pension (Transition) which is paid to people aged 65 who have retired from work will be abolished from 1 January 2014. Employees who retire at age 65 will no longer receive this transition pension and will have to wait until age 66 to receive the State Pension (Contributory). This may create a significant gap in their income.
- The age at which people will receive the State Pension (Contributory) will further increase from age 66 to age 67 from 2021.
- This age will again increase from 2028 to age 68
Despite the change only being several months away, it would seem that many employers have yet to assess the potential impact on their business plans/work-force planning and to determine the course of action which best suits their business. Indeed, employee knowledge of the actual impact of these changes on their pension and retirement planning is worryingly low. For employers with “integrated” defined benefit schemes, there is an urgent need to make changes to their trust deed and other pension plan documentation to ensure their scheme continues to operate as intended.
An immediate concern is in relation to those individuals who had been eligible to receive the State Pension (Transition) from 1 January 2014. Due to the above changes they will now have to wait until they reach age 66 to receive the state pension. Some individuals may be able to qualify for Jobseeker’s Allowance to cover part of the shortfall but there remains a considerable drop in their immediate retirement income as a result of the changes. Many would view this as an issue for the individual concerned, but this may ultimately fall back on the employer, particularly as the retirement age increases further.
Current Irish pension and employment retirement ages
Irish employers have effectively been operating under three “types” of retirement ages:
- Employment contract retirement age – some employment contracts specify a retirement date. However, even where none is specified there may be an expectation (normally 65).
- The retirement age specified in the occupational pension scheme’sTrust Deed & Rules.
- Age at which individuals start to receive the State Pension which is often used to align people’s retirement dates.
There can be differences between an employee’s contractual retirement age, his or her normal retirement age provided for in an occupational pension scheme and the State pension age at which employees become eligible for the State pension, but to date these have typically been aligned as age 65 for most employees.
Whilst Irish legislation currently permits a setting of a compulsory retirement age, overriding European law may in future hinder employers from imposing compulsory retirement ages on age-discrimination grounds (except in exceptional cases).
What are the questions for employers?
A wide range of questions arise such as whether the employer wishes to or could be required to allow employees work beyond the retirement age specified in their employment contract. Should they permit later payment of pension or align their pension normal retirement age with the increases in the age at which people receive the State Pension?
These questions and concerns need to be addressed in the context of the employer’s business needs, work-force planning, cost and employment law.
What should employers do?
Employers need to consider the potential employment and pension implications of these changes and decide upon the approach that best suits their business:
- Decide which retirement age approach should be adopted in future
- Review employment contracts, pension scheme documentation, employment case law, etc. to assess if the preferred approach is feasible
- Consider the impact on the pension scheme of the preferred approach
- Identify individuals who will be affected by the changes in the short-term
- Take advice and decide on a response to requests to remain in employment beyond contractual retirement age (if any) - keep under review as legislation or case law develops and be mindful of setting precedents
- Educate and engage with employees on the impending change
- Group employee sessions
- One-to-one employee retirement planning sessions primarily for those who will be affected in the short term.