Pensions and retirement - where are we now?

12/08/2010

By Nick Hobden, Partner and Head of Employment

At our recent HR Club events in Tunbridge Wells and the Thames Gateway, one subject that got people talking was the current plans for changes both to the state pension age ('SPA') and the default retirement age ('DRA'). In this article, we will review some of the issues that we discussed.

Currently, most employers are entitled quite lawfully to compel their staff to retire upon them reaching 65 years of age. In turn, those employees are highly likely to be able to claim a state pension, as well as any private pensions that they may have saved for, at that stage. But over recent years, the Government has become increasingly concerned about:

(a) the affordability of the current state pension and

(b) the extent to which employees ought to be able to work beyond 65 should they wish.

At the time of the recent General Election, the Labour Government was in the process of conducting a review of the current DRA of 65. Many in the business community were concerned about the very real possibility of the DRA being scrapped; they were, perhaps understandably, hopeful that an incoming Tory Government might be more inclined to leave things as they are. However, whilst it may be the case that the Conservative-led Coalition is less ideologically driven to remove the DRA, what is certainly for sure is that it is keen to reduce the cost of what it sees as an unaffordable state pension system. 

The new Work and Pensions Secretary, Iain Duncan Smith, recently set out the Coalition's plans for raising the SPA to 66 as early as 2016 for men and 2020 for women. The Coalition also indicated its intention to 'phase out' the DRA. This was interpreted by most as an indication that the Coalition would dispense entirely with the right of employers compulsorily to retire staff when they reach a certain age. However, of course, there was the prospect that this might be done in stages, with the DRA increasing gradually over a period of time, possibly in line with the SPA.

It seemed logical that the DRA would, at the very least, have to increase in line with the SPA. After all, to do otherwise would result in a situation in which employees could turn 65, be compelled to leave their job, but without the right to claim a state pension for a year or more. This would clearly be unfair.

Well, since our HR Clubs, the situation has become clearer. On 29 July 2010, the Government published a consultation document in which it set out its intention to begin to phase out the right to serve notice of retirement by reference to the DRA from April 2011.  Under these proposals, by October 2011, no further dismissals by reason of retirement could rely upon the DRA. Anyone wishing to compulsorily retire a member of staff after this time would need to be able to justify its decision before an Employment Tribunal; this is likely to be difficult in the vast majority of circumstances.

Mr Duncan Smith has tried to suggest that these changes to the laws relating to pensions and retirement are, at least in part, motivated by the wish to retain people's skills in the workplace, rather than lose all that knowledge and expertise. The Coalition is also keen to emphasise its intention to implement an annual increase to the state pension in line with earnings, inflation or at the rate of 2.5% (whichever is the higher). This is meant to take the edge off the fact that we might have to work a bit longer. But whether these statements truly sway the opinion of either employers or employees is another matter. It's worth remembering that employers aren't the only ones who have reservations about these changes. Raising the SPA is unpopular with trade unions; after all, it reduces the likelihood of employees being able to afford to retire, even if they reach 65 and want to hang up their boots.

For now, we must watch and await news of the outcome of the consultation process.  Consultation ends on 21 October 2010 and the Government intends to publish a response to the consultation in November 2010. This won't leave employers very much time to adapt to the new changes before they start to have an effect. So it makes sense to start thinking through the implications now.

If you are facing a retirement situation and want to discuss it in more detail, contact a member of the Employment team.