The government’s consultation on how the new age discrimination regulations will affect pension funds closes today – but if no changes are made to draft regulations then they could prove expensive.

So says Mercer Human Resource Consulting, which is warning that if the regulations are implemented in their current form then at least a third of pension schemes might have to reduce members’ benefits or go through the costly exercise of setting up a new pensions trust.

According to Mercer, the draft regulations will severely restrict employers’ ability to have more than one ‘section’ in their pension scheme.

For example, it will be difficult for them to place new employees in a defined contribution section and allow existing staff to continue building benefits in a defined benefit section.

This is because it could be deemed indirectly discriminatory for members of the same scheme to receive different levels of benefits, since new employees are generally likely to be younger than existing scheme members.

Consequently, employers may be forced to either set up a new scheme under a different trust, which can be complicated and expensive, or offer all scheme members the same benefits in future.

In many cases, this will mean all employees are moved into a defined contribution scheme, which is likely to result in benefits being reduced.

Dr Deborah Cooper, principal at Mercer, said: “The government seems to be so fearful of failing to properly implement the EU Directive on age discrimination that it is prepared to erode the structure of UK occupational pension provision.

“Many companies could be affected by the new proposals, including those that have closed their defined benefit sections to new staff but not changed their provision for existing scheme members.

“These employers will now be pushed into a corner and may have little option than to reduce existing members’ benefits in order to comply with the new age discrimination rules.”

Implementation of the age discrimination regulations as they apply to pension schemes has already been delayed as the original proposals were deemed unworkable. Following this consultation, they are due to be implemented on 1 December this year.

“The government needs to get back to the drawing board and come up with a set of proposals that schemes can work with and that will not damage pension provision for members,” said Cooper.

Mercer believes the government should largely exempt pension schemes from the regulations, rather than attempt to exclude specific rules that may only apply to some schemes. It can then target the few scheme rules and practices that it feels should not be permitted, for example, insisting that a pension needs to be taken at a certain age.

Cooper added: “Employers have been faced with a raft of legislation in the last few years that has made it increasingly difficult to continue providing defined benefit pensions for existing members.

“Through these age discrimination proposals, the government is going a step further and attempting to micro-manage employers’ benefit and remuneration policies.”