What to look out for with age-based contribution structures
As defined contribution schemes are now often the sole pension scheme open to employees, DC scheme design, including the option of having age-related contributions, takes centre-stage. So what needs to be kept in mind to avoid age discrimination?
In defined contribution, companies can choose to have a flat contribution structure for all employees or apply age bands.
The Financial Times, which publishes Pensions Expert, has reduced the number of age bands in its DC scheme to two from previously three with effect from January 1, allowing members below age 30 to contribute up to 6 per cent, attracting double-matching from the employer.
You couldn’t have bands for young people at 1 per cent and then suddenly 15 per cent... but it doesn’t mean to say that you can’t have a stepped system
But while this offers a better savings opportunity for young members, it is uncertain whether they will make use of it.
Sarah Hopkins, global human resources director at the FT, said she expects take-up to be “quite low”.
Hopkins added that the company is looking to increase engagement through staff presentations and other communications “to try and get people thinking about [pensions] more”.
The change in the FT’s scheme design was part of negotiations with the National Union of Journalists as the company set up a new DC scheme following its sale by Pearson to Nikkei in late 2015.
NUJ father of chapel at the FT Steven Bird said the union would have liked to see all employees benefit from the highest contribution level (8 per cent), currently reserved for over-45s, but was pleased with the outcome.
“If [the FT] double-match at that age it makes a big difference for the final pension,” he said.
What should employers keep in mind?
Pension schemes enjoy several legal exceptions that allow them to have rules relating to age without committing age discrimination under the Equality Act 2010.
These mean schemes can have age-based contribution levels if the purpose is to equalise or make “more nearly equal” the benefit.
Ruth Bamforth, senior associate at law firm Walker Morris, said there can still be a difference in the final benefits, however.
“The guidance is not very scientific as to what ‘more nearly equal’ actually means,” she said. “The idea would be to get some actuarial advice to satisfy the test.”
Bamforth said if age bands are in place, then the fewer there are, the bigger the potential difference between them, which could make it harder to meet the test.
Older workers and pensions – what you need to know
Employment of older workers has grown significantly: a recent Department for Work and Pensions study revealed that during the past 30 years, the employment rate for people aged 50-64 has reached nearly 70 per cent from just over 55 per cent, and for the over-65s has more than doubled to 10.2 per cent.
“So you couldn’t have bands for young people at 1 per cent and then suddenly 15 per cent... but it doesn’t mean to say that you can’t have a stepped system,” she explained.
Tom Barton, partner at law firm Pinsent Masons, said the use of age bands is not uncommon but depends very much on the individual employer.
He said employers should always look at contracts and past communications before changing scheme design.
“If you’re changing scheme design employers would generally be well-advised to… think about any requirements for consultation that might exist because of what’s said in contracts and scheme rules and documents.”