Older workers and pensions – what you need to know

At nearly 10 per cent, the proportion of people aged 70-74 in employment has also almost doubled during the past 10 years.

This can partly be explained by demographic changes, but also by changes in retirement aspirations.

Unless a decision can be objectively justified, it may be treated as age discrimination not to allow for future accrual

Retirement has become a process of cutting down working hours, as it is often considered better for older people to continue working, albeit a little less, and still contribute to the economy and their own finances, rather than not work.

But an ageing workforce brings challenges for employers and trustees, who need to consider the following:

• Do they have a flexible retirement policy allowing employees to work past normal retirement age?

• Will they allow employees to continue working while drawing benefits from the workplace pension scheme? If not, is this a tenable stance?

• If they have not changed their practices to support flexible retirement and working past NRA, are they leaving themselves open to age discrimination challenges?

• Should they amend their reward strategy for individuals working and drawing benefits concurrently?

• If their policies have changed, are they documented properly in employment contracts, pension scheme rules and other documents?

• Have they quantified the costs of flexible and late retirement changes?

DB: Continued accrual or late payment bonus?

Schemes need to consider how to provide benefits for members working past the scheme’s NRA, as there is no exemption under age discrimination legislation for ceasing to provide future accrual after this age.

This means unless a decision can be objectively justified, it may be treated as age discrimination not to allow for future accrual. In addition, if the scheme qualifies for auto-enrolment purposes, employers must enrol qualifying employees up to age 75.

Defined benefit schemes typically adopt one of two approaches to working past NRA: either continuing to allow accrual, or ceasing accrual and increasing the deferred pension for late payment.

Only the first approach does not risk a discrimination claim, but a member could receive a pension of higher value under the second option – so think before considering withdrawing this option. One solution could be giving a choice between continued accrual and receiving a late retirement increase.

What DC schemes should keep in mind

For defined contribution schemes, contributions should continue past NRA. However, schemes with age-related contributions need to ensure the scale for calculating contributions complies with age discrimination legislation.

The legislation provides a general exemption for age-related contributions where the aim in setting the different rates is to equalise, or to make more benefits nearly equal, for members of different ages in respect of comparable aggregate periods of pensionable service.

Age discrimination legislation allows the withdrawal of group risk insured benefits, such as life assurance cover or income protection cover, at age 65, or state pension age if greater.

However, it is likely there will be a gap in expectations between the risk benefits that older employees want and what employers are willing to offer.

If insured benefits are underwritten to later termination ages the cost for employers will be onerous. It may be that cover is so expensive an employer would feel justified in not providing it, although they may then need to provide an alternative benefit, such as a salary increase.

DC scheme trustees must consider whether their investment options remain appropriate for members working past NRA, especially those investing in a default lifestyle fund targeting the member’s NRA. It is important to communicate with members so trustees can tailor their investment strategy accordingly.

With extended working lives and flexible retirement set to continue, careful planning is paramount in ensuring pension schemes remain fit for purpose for the transition from work to retirement.

Julian Rowe is senior technical consultant at JLT Employee Benefits