The new age laws are yet another layer of regulation bringing with them the risk of substantially increased costs for pension schemes, and follow on from a long line of changes that have significantly altered the retirement benefits landscape in recent years.
Deficits in final salary schemes have been growing due to a combination of the loss of tax relief, falling investment returns and increased life expectancy. The Pensions Act 2004, which was the pension world’s ‘big bang’, introduced the pensions regulator, compulsory training for trustees, and the Pension Protection Fund, funded by a levy on pension schemes.
Companies have learned the hard way that, not only are pensions a significant cost, they can also affect the business in other ways – with high-profile deals at WH Smith and Marks & Spencer floundering because of concerns about pension deficits.
Employees and trade unions have learned that pensions are a valuable benefit to be jealously guarded. They also make good media headlines. Any proposed changes to pension benefits, let alone a closure or winding-up of a scheme, can bring press scrutiny and protracted negotiations with employee representatives – as British Airways’ current attempts to deal with its pension deficit demonstrate.
Conversely, as employees become more informed, an employer with a generous pension scheme will be able to use this to recruit and retain the top talent.
The concept of retirement is inextricably linked to age, so any move to outlaw age discrimination was likely to be problematic for pension schemes. However, recognising the value of private pension provisions, the Department of Trade and Industry (DTI) stated in its 2005 consultation on the age regulations that occupational pension schemes “should be able to operate largely as they do now”.
With the benefit of hindsight, this now seems hopelessly optimistic.
It was obvious to the pensions industry that the exemptions set out in the original draft legislation left many pension scheme rules and practices open to challenge. At the last minute, the DTI agreed, and postponed the pension provisions of the age regulations to look again at the exemptions.
The amended regulations, which contain new exemptions, were then hurriedly published. But there are still significant gaps that leave schemes exposed – for example, issues surrounding the provision of benefits to staff who choose to work beyond their normal retirement age.
From 1 December, employers and pension trustees will have to ensure that scheme rules and practices do not directly or indirectly discriminate against employees on the grounds of age, unless a relevant exemption applies, or they can objectively justify the decision.
The meaning of objective justification is likely to be hotly contested in the courts, but case law suggests that the higher cost of providing a benefit in a non-discriminatory way will not, by itself, be enough. A successful claim by an employee would result in the ‘levelling up’ of pension benefits at substantial cost to the employer.
The age of 65 will not necessarily be the natural time to stop working for everyone, so a pension scheme configured to pay out at a set retirement age may not be the best way of rewarding employees.
Given the recent changes to the pension landscape, employers should be thinking very hard about the benefit they get from their pension schemes. Cost, investment risk, over-regulation and changing working patterns may mean it is time to retire the pension scheme as we know it.
The company pension scheme: for and against
Attracts new recruits and assists retention
Gives company a reputation as a ‘good employer’
Assists employees in saving for their retirement
Costly to administer
Difficult to recruit trustees due to new knowledge and understanding requirements
By Jacqui Piper, solicitor, pensions, Shoosmiths