Originally pubilshed in Forward Thinking, August 2007
Make sure you’re in the know about employee rights and your responsibilities.
The new Employment Equality (Age) Regulations 2006 came into force on 1 October 2006 and prohibit discrimination, harassment and victimisation on the grounds of age. Employees now have a statutory right to work until the age of 65.
The new age discrimination rules have forced companies to reassess benefit arrangements and prepare for additional costs. Care is required to manage changes to employee benefits and pension schemes.
Defined benefit schemes
Even before the introduction of age discrimination legislation, defined benefit schemes were in deficit. Employers usually have to contribute extra funds to manage the deficit, and any ‘debt’ must be reflected in the balance sheet in accordance with accounting regulations. This can reduce apparent profitability.
Now factor in age discrimination legislation. Employees have a statutory right to work until they are 65 (rather than 60) and accrue an extra five years of pension rights. So, if someone has pension rights that are 1/60th of a final salary of £30,000 per annum for each year of service, this gives the individual an increased pension of £2,500 per annum.
In addition, there will probably be a pension of 50% (typically) payable to the employee’s spouse, partner or dependant in the event of death in retirement, and some of the pension may rise in line with inflation. Extra funding – mostly from employers – will be required to support such increases in pension rights.
A solution may be to restructure pension benefits so that rights earned after 60 are not on a defined benefits basis. However, employers cannot encourage people to retire early by promising no actuarial reduction to their pensions, nor can extra years of service be credited to early retirers.
Defined contribution schemes
For defined contribution schemes, employers must contribute until the age of 65 (where applicable). However, if the scheme has a contribution structure that is tiered by age, that structure may only continue if it achieves a ‘more nearly equal’ outcome, whereby there is broadly the same pension outcome for all members. Tiering structures may be revised or abolished, and contributions levelled up where there are contractual issues.
For GPPPs and stakeholder pension plans, the legislation will allow age-related, tiered contributions. Again, this is only allowed provided the aim of the contributions is to achieve an equal outcome. One way of retaining an age-related, tiered contribution structure might be to ‘objectively justify’ the plan, although insurers may be unwilling to write schemes to a higher retirement age.
Medical and life insurances
The rise in the female retirement age to 65 means that many employers will have to renegotiate the terms of their insurance packages, resulting in higher premiums. Premiums for private medical insurance are often age-related in bands of five years, with as much as a 50% increase in the annual premium from 60-64 to 65-69 years.
Even a small increase in the term for life insurance schemes will have a significant cost impact. Indeed, hikes in rates from 20% to 40% have already been seen. Similarly, changes to permanent health insurance – such as simply raising the normal retirement age – could carry cost increases of up to 50%.
Older employees also tend to have more health issues leading to claims, so as the age profile of employees changes, so will the inherent risk. As mentioned earlier, insurers could refuse to write schemes to cover higher ages or decline to cover individual employees. This could mean companies having to self-insure some employees, resulting in unplanned contingency costs for older staff.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
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