willis 2013 survey report - increase in state pension age

INCREASE IN STATE PENSION AGE

WILLIS SURVEY RESULTS

www.willis.ie

INTRODUCTION

2014YEAR

STATE PENSION AGE

YEAR OF BIRTH 1949 - 1954

66 YEARS

Legislation to increase the age at which the State Pension becomes payable was enacted in 2011. The changes phase in over time starting from next year

In a number of companies, the Normal Retirement Age (NRA) in pension schemes took into account when the State Pension would be paid. So a key question is should the change in the State Pension Age have any impact on when employees will retire in the future?

We have carried out a survey of our clients to understand how significant an issue this change really is and to gain insights into how they intend to manage this change.

2021YEAR

STATE PENSION AGE

YEAR OF BIRTH 1955 - 1960

67 YEARS

2028YEAR

STATE PENSION AGE

YEAR OF BIRTH 1961 OR LATER

68 YEARS

INCREASE IN STATE PENSION AGE, WILLIS SURVEY RESULTS

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DEMOGRAPHICSAN ONLINE SURVEY WAS CARRIED OUT IN QUARTER 2 OF 2013

The profile of organisations include: SMEs, multinationals

and State-owned.

THE PROFILE

An online survey was carried out in Quarter 2

of 2013.

Completed mainly by those from HR and

Finance backgrounds.

from a range of industries including: Finance, Banking, Insurance, Energy & Utilities, Education,

Pharmaceutical & Health, Retail, Professional Services, Leisure & Travel, IT,

Consumer Goods, Not for Profit & Telecommunications.

OVER 120RESPONDENTS

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KEY FINDINGS

Pensionable salary should include integration with State Pension from NRA even if State Pension is paid from a later date.

The change to State Pension Age is an emerging issue for over a quarter of respondents. Where it has been raised as an issue, it is generally by employees directly in the first instance.

Over 70% of respondents have a Normal Retirement Age (NRA) of 65 years specified in contracts of employment.

Over half of respondents have not allowed or do not have a precedent for employees working beyond NRA.

For those who allow working beyond NRA, 40% do not provide pension and death in service benefits for this service and only 20% of schemes allow for the deferral of payment of pensions to the date of late retirement.

Two thirds of respondents would prefer employees to retire at NRA or 65.

Health & Safety concerns are relevant or very relevant to two thirds of respondents when considering extending NRA.

The number one consideration regarding changes to NRA is costs, followed by threat of legal challenge, then impact on industrial relations and finally staff morale.

Over half of respondents feel that they cannot justify maintaining NRA on objective grounds.

Three quarters of respondents are not prepared to offer a temporary payment to bridge the gap in lieu of the State Pension.

90% of respondents do not offer flexible benefits to employees and almost the same number do not intend to introduce an offering.

We haven’t fully decided if we will change the retirement age to reflect the increase in State Pension Age. Still under review.

The Company has only recently discussed this issue but as yet no plan is in place to resolve these issues.

What you said

70%

of respondents have a Normal Retirement Age

(NRA) of 65 years

of respondents who allow working beyond NRA, do not provide pension and death in service benefits

for this service

of schemes allow for the deferral of payment of pensions to the date of

late retirement.

40%

of respondents do not offer flexible benefits to

employees

20% 90%

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Given the age profile of your workforce, is the increase in the age for State Pension a relevant issue for you?1 Has the issue of the increase in the age for State Pension

been raised with you? 2

RESULT:The increase in the age for State Pension is an emerging issue with over half of respondents identifying it as a relevant issue within the next 5 years.

WILLIS VIEWFor many companies the change in State Pension Age is an immediate or short-term issue. But the change affects every company, and employers will need to plan sooner rather than later for any change in employment or pension policy that might be required.

RESULT:The issue has been raised with over a third of respondents.

WILLIS VIEWThe issue has been raised in a significant number of companies which confirms the need to consider and decide on an approach.

The issue may be considered in the context of an overall review of pension policy, for example, where companies are dealing with changes to defined benefit schemes to deal with pension deficits.

25%

20%

22%

4%

WITHIN THE NEXT 2 YEARS



IN MORE THAN 10 YEARS

NO ISSUE AT ALL

YES

NO

41%

59%

29%

SURVEY RESULTSINCREASE IN STATE PENSION AGE, WILLIS SURVEY RESULTS

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Who has raised the issue of the increase in the age for State Pension? 3 How have you dealt with employees working beyond

Normal Retirement Age (NRA) in the past? 4

RESULT:The majority of queries regarding the changes have come from employees directly.

WILLIS VIEWThe high proportion of schemes where the issue has been raised by employees reflects the significant personal impact the change has on members. Trustees, unions and employers may also be considering the issue in the context of wider pension reforms.

EMPLOYEES

TRADE UNION

PENSION SCHEME TRUSTEES

SENIOR MANAGEMENT

BOARD OF DIRECTORS

SHAREHOLDERS

OTHER

PERMITTED

PERMITTED WITH CHANGES TO CONTRACTS

NOT PERMITTED

NO PRECEDENT

RESULT:Over half of respondents have not allowed or do not have a precedent for employees working beyond NRA.

WILLIS VIEWThe change in State Pension Age is likely to increase demand from employees to continue to work past NRA. We expect to see the proportions in this chart changing over time.

40%

10%17%

20%

9%1%

3%

41%

59%

11%

31%

32%

26%


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What do your contracts of employment state regarding NRA? 5

For employees permitted to work beyond NRA (with or without contract changes) will you allow pension scheme benefits to continue, and if so, on what basis?6

RESULT:Almost three quarters of respondents have contracts of employment which allow for NRA of 65 years.

WILLIS VIEW:This chart suggests that, until the changes in State Pension Age, there was significant alignment between NRA and State Pension Age. This will be misaligned from 2014 onwards, creating a “pension gap” for employees.

65 YEARS

OTHER SPECIFIED AGE BELOW 65

OTHER SPECIFIED AGE ABOVE 65

SILENT, NO DETAILS

REFER TO PENSION BOOKLET

CONTINUE TO ACCRUE PENSION BENEFITS

CONTINUE TO ENJOY DEATH IN SERVICE (LIFE ASSURANCE) BENEFITS

BOTH

NEITHER

RESULT:For those organisations who allow working beyond NRA, 40% curtail pension and death in service benefits for this period of service.

WILLIS VIEW:The approach to paying for pension and life assurance benefits after NRA may need to change if the number of employees looking to stay-on increases significantly.

10%

74%

8%

5%

6%7%

12%

25%

23%

40%


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For employees working beyond NRA, when is their pension payable under pension scheme trust deed and rules? 7

Would you consider offering employees a temporary payment to replace the State Pension from age 65 to age 66/67/68, as appropriate?8

RESULT:For those employees working beyond NRA, in a third of cases, their pension benefits are payable at NRA.

WILLIS VIEW:Companies may wish to have more flexibility here in future. For example, some employees may want to defer their pension and continue working full time. Others may want to draw their pension but work part-time to make up for the loss in State Pension until this is payable.

AT DATE OF LATE RETIREMENT

AT NRA

EITHER OF ABOVE, AT EMPLOYEE’S OPTION

TRUST DEED AND RULES ARE SILENT ON THE ISSUE

RESULT:Over three quarters of respondents do not wish to consider offering a temporary bridging payment to replace the State Pension during the gap years.

WILLIS VIEW:Accommodating changes to NRA may be unacceptable to most employers especially in the current challenging times.

Most employers take the view that they should not be expected to make up for changes to State Pension Age, changes in tax relief, or payment of the Pensions Levy.

10%

74%

8%

5%

6%7%

12%

25%

23%

40%

18%

36%23%

23% YES – ORGANISATION WOULD

CONSIDER PAYING FULL COST

YES – ORGANISATION WOULD CONSIDER SHARING COST WITH EMPLOYEES

NO

7%

17%

76%


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Given the nature of your organisation, how relevant are health and safety considerations to employees working beyond 65 years or NRA?9 What are the most important factors in reaching a

decision about changes to NRA?10

RESULT:For over three quarters of respondents, health and safety considerations are relevant or very relevant factors in a decision to allow an employee work beyond NRA.

WILLIS VIEW:Given the high number of companies who gave this response, it does the raise the question whether these concerns would stand up to the scrutiny of objective justification as required by equality legislation.

VERY RELEVANT

RELEVANT

NOT RELEVANT

RESULT:Costs are the key factor in reaching decisions on extending NRA.

WILLIS VIEW:The cost argument is a complicated one. If a member who retires is automatically replaced then a change to NRA may have no additional cost for companies. Companies will need to consider employment costs and pension costs together – as well as the other factors considered relevant.

10%23%

COSTS

IMPACT ON INDUSTRIAL RELATIONS

IMPACT ON STAFF MORALE

THREAT OF LEGAL CHALLENGE

7%

17%

76%

34%

37%

29%

38%

21%

16%

25%


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What is your preferred outcome option for employees?11Can you justify maintaining NRA on objective grounds such as reduced promotional/ progression opportunities for other employees?12

RESULT:Two thirds of respondents would prefer that employees retire at NRA or 65 years of age.

WILLIS VIEW:Although companies may have a preference regarding retirement age, recent equality cases demonstrate that this preference may be challenged and if so, will have to be justified.

It is interesting to note that one third of employees believe the preferred outcome is one where the employee retires at State Pension Age, presumably to avoid a State Pension gap.

RETIRE AT NRA

RETIRE AT 65

RETIRE AT STATE PENSION AGE

RESULT:Over half of respondents stated that they cannot justify maintaining NRA on objective grounds.

WILLIS VIEW:The absence of objective grounds strengthens the case for a successful challenge (on equality grounds) to an employer’s retirement policy.

This suggests that more employers will have to deal with this issue than is currently the case.

10%23%

YES

NO

26%

42%

32%

46%

54%


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SUMMARY OF LEGAL CASES DETAILS AND RULINGS

DEVELOPMENTSLATEST

There have been some interesting employment law rulings in this area recently where employees have challenged the decision to impose a compulsory retirement age on the grounds of age discrimination. In the case of SWEENEY V AER LINGUS, it was found that the justification of termination of employment on retirement at 65 years on the basis that entitlement to pension benefits commenced at that age was age discrimination. It was held that pension entitlement does not necessitate retirement. It was noted that the complainant was in receipt of a full pension and compensation of €5,000 was awarded.

In the case of DOYLE V ESB, there was no contractual retirement age but as a member of the company’s pension scheme, there was a specified retirement age. Fixed term contracts beyond normal retirement age had been offered to others in the past in exceptional circumstances only. Although employed as a graphic designer, the company successfully argued that maintaining a compulsory retirement age was objectively justified for the following reasons:

nIt needed to provide promotional opportunities and career pathways to retain younger employees

nThere are Health & safety concerns in respect of older employees nIncreased retirement age would necessitate physical examinations which might cause embarrassment to employees.

The company’s position of maintaining a retirement age was found to be legitimate to ensure cohesion amongst all employees and to encourage the recruitment and retention of young people. Finally, in the case of MCPHILLIPS V ISS FACILITY SERVICES, there was a normal retirement age of 65 years although it was not universally applied in the company. A fixed term contract was offered and accepted at 65 years but not renewed the following year. It was found that it was not a true fixed term contract and it was terminated on the basis of age without any objective justification. Compensation of €22,000 was awarded which was the equivalent of one year’s salary. It is evident from these cases that the objective justification test is central to consideration of cases of age discrimination and compulsory retirement ages. The following 3 stage test appears to be key when required to justify compulsory retirement:

Do the measures seek to achieve a legitimate purpose? A legitimate aim may be regarding fairness and dignity between different age groups in a company. Cost reduction and competitiveness arguments are not considered legitimate objectives.

STEP 1

Is the aim legitimate in the particular circumstances of the business?

STEP 2

Are the means of achieving the aim proportionate to achieving a balanced and diverse workforce?

STEP 3

n For Defined Contribution scheme members the positives of an additional year of pension contributions and better annuity rates by retiring later may outweigh any negatives. But consideration still needs to be given to issues such as adjusting the Lifestyling target retirement age.

Even if you don’t change either contractual retirement age or NRA, you may still have pension considerations:

n If you agree to allow employees to continue working past NRA, do they continue to accrue pension benefit/are they still covered for life assurance benefits (with associated costs)? And if they don’t, can employees continue to contribute themselves to the pension scheme? Many trust deeds may not allow this without a rule change.

n If employees are obliged to leave service at contractual retirement age, even though possibly willing to stay on, will they put pressure on employers to provide a “bridging pension” to cover the year(s) after retirement when no State Pension is paid?

All the above need to be considered in light of the “objective justification” test for different treatment on age grounds mentioned above.

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IMPACT ON PENSIONS

DEVELOPMENTSLATEST

Any change in the contractual retirement age will have an impact on your company pension scheme and the following pension issues need to be considered:

Any changes to NRA may require trustee consent, depending on the scheme’s amendment power. Trustees have an obligation to act in the best interests of the scheme beneficiaries; the trustees’ response will depend on the proposal for change and the impact on members.

There may also be underwriting issues for life cover beyond NRA of 65 years – some insurers may refuse to extend cover beyond 65.

n Do you increase pension scheme Normal Retirement Age (“NRA” – the age at which members are entitled to scheme benefits) in line with an increased contractual retirement age?

n Members continue to accrue benefits and are covered for life assurance benefits (with associated costs);

n Is the increased NRA to apply to deferred members (former employees) too?

If Yes

n Issues particularly for Defined Benefit schemes in this situation are:

n If a member retires at the old NRA from a defined benefit scheme, is the pension reduced for early payment?

n An increase in NRA can reduce the scheme’s liabilities.

n Will members of schemes which cap the number of years of service that can count towards pension have to continue to contribute even if their service is over the cap?

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SUMMARYA number of employees particularly in the private sector, are raising the issue of remaining in work beyond Normal Retirement Age.

YOUR CHECKLIST

For a variety of reasons, this creates challenges for employers to allow employees work beyond Normal Retirement Age .

However, this position may be difficult to maintain unless it can be objectively justified.

The number of requests are likely to increase.

Companies may need to challenge their thinking and benefits offering.

n Think of the impact of change on employment contract AND pension scheme benefits

n Check trust deed and rules – you may already have flexibility regarding retirement age

n Ensure scheme trustees are on board with any amendment to scheme rules

n Make sure communications to members about pension are kept up to date following any change

n Ensure you can justify your position from an age discrimination perspective

DO’S

n Expect the Government to sort the problem (although a Departmental Steering Group was established to review the issues, very little has come to light to date)

n Assume a change to State Pension Age, or contractual retirement age, carries through to your company pension scheme NRA without any further action

n Forget about ancillary benefits such as life assurance and ill-health/long term disability cover

DON’TS

CONTACTKirstie FlynnPensions Lawyer T +353 1 [email protected] Tara FlynnDirector, HR ConsultingT +353 1 407 [email protected]

www.willis.ie

Dublin Grand Mill Quay, Barrow Street, Dublin 4Tel: + 353 1 661 6211

Cork 5 Lapps Quay, Cork Tel: + 353 21 420 7700

LimerickCrescent Court, St. Nessan’s Road, Dooradoyle, Limerick Tel: + 353 61 218 900

For further information or to discuss any aspects of this survey, please contact:

[email protected]

ABOUT WILLISWillis is one of the leading insurance brokers, pensions, actuarial and risk management consultancies in Ireland. We employ over 240 people in our offices in Dublin, Cork and Limerick. Willis Group has more than 400 offices in some 100 countries, with a global team of approximately 17,000 Associates, serving clients across the globe.

Willis Risk Services (Ireland) Limited (t/a Willis) is regulated by the Central Bank of Ireland.

In respect of Actuarial and Risk Management Consultancy, the provision of these

services does not require licensing, authorisation or registration with the Central Bank of Ireland. As a result, these services are not covered by the Central Bank’s requirements designed to protect consumers or by a statutory compensation scheme.

Registered number: 78812.

Registered address: Grand Mill Quay, Barrow Street, Dublin 4.

willis 2013 survey report - increase in state pension age

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