A radical shake up of the state pensions announced by the coalition government will involve an acceleration of the plans to raise the retirement age in order to help reduce the budget deficit and a plan to scrap the default retirement age of 65 from 1 October 2011.
 

These controversial announcements have received some mixed reactions. Unions and campaign groups have argued that these changes will penalise manual workers and the poorest in society, who live in areas where life expectancy is lower. And, whilst many business groups have welcomed the plans, some have expressed concerns about the practical implications and risks to employers if the default retirement age is abolished.

So what are the implications for businesses and employees? How can employers plan for these changes and help their employees plan ahead for retirement?

Firstly, it is important to mention that some good news for pensioners emerged in the Emergency Budget in June. The chancellor announced that the link between pensions and earnings will be restored, and a triple guarantee was given that state pensions would increase in line with prices, average earnings, or by 2.5%, whichever is highest. The restoration of the average earnings link is said to be worth £600m a year to those claiming a state pension, and has been widely welcomed by both older age groups and retirement experts.

But, at the same time the government also announced plans to increase the retirement age for men to 66 as early as 2016, a decade earlier than planned under the Labour government. The retirement age will then be reviewed regularly to ensure it is kept in line with rising life expectancy, with suggestions that it will rise to 67 between 2034 and 2036 and 68 between 2044 and 2046. Ministers are also considering extending it even further, perhaps even to 70 and beyond in future decades. 

These plans seem particularly controversial in light of news from the National Audit Office last month which showed a widening life expectancy gap between people living in the poorest and most affluent UK areas. Life expectancy is currently 77.9 for men and 82 for women, however, in the poorest areas this dropped to 75.8 for men and 80.4 for women.

Unpopular as these changes might be, the government believes they are a necessary step towards addressing the nation’s pensions’ crisis. With one in four babies born now expected to live to 100, Work and Pensions Minister, Iain Duncan Smith said the government has ‘no option’ but to increase the retirement age.

Let’s not forget too that for many people, particularly those nearing retirement, the ability to keep working without the risk of being forced into retirement is welcome news. A recent survey of the over-50s conducted by Saga and the National Endowment for Science, Technology and the Arts (NESTA) found that 61% of respondents wanted to work past their retirement age in order to earn money, 59% wanted to keep their mind active and 50% wanted to work because they enjoy it. It is a fact we are all living longer, we are more active and many of us need to fund a comfortable retirement and so working is inevitable.

However, the business community has expressed concerns that axing the default retirement age could damage businesses and that employers will lose their ability to effectively manage their workforce. Many business leaders believe that having a clear framework for the timing of retirement, benefits both the company and employees and that this should not change. The CBI for example, has called for an increase in the default retirement age, rather than a scrapping of the default age. It also believes that if the default age is scrapped then businesses need clear exit routes to help them manage the situation. There is a risk that without clear exit routes for staff, businesses could leave themselves open to age discrimination claims and could be saddled with many employees who are no longer fit for their roles.

At present, there are no firm plans or a timescale in place for this and in the meantime, the business community is hoping to engage and lobby government to ensure it carefully considers these plans. We hope that if these plans come to fruition that they will include practical solutions to help employers effectively manage the retirement of their workforce.  

In 2012, there is a major reform of workplace pensions planned which will see all employers having to auto-enrol eligible employees into a workplace pension or the government’s National Employment Savings Trust (NEST) and contribute a minimum of 3% of band earnings (£5,035 and £33,540) towards their retirement. Employees will be expected to contribute 5% of earnings, of which 1% will come in the form of tax relief. Whilst employees will have the option to opt out, employers will not. Any employee who opts out of auto-enrolment will be re-enrolled every three years. The government will phase in employer contribution rates, starting initially with larger employers, in recognition of the enormity of the reform.

Although the plans for auto-enrolment were put in place by the Labour government, the coalition government them and has announced that it will also conduct a review of private pension reform and reveal the results shortly.  There is some speculation the new government may look to scrap the NEST scheme, which has come under criticism for its high initial charges and limited fund choice. Others believe that it may look to increase the lowest earning limit for those to be auto-enrolled from around £5,000 to £10,000 per annum.

The real issue here lies in finding a solution to how auto-enrolment may affect means-tested benefits. As it currently stands, many employees close to retirement age with little pension provision could find that as a result of auto-enrolment not only does their income drop as they make contributions into a workplace pension but when they reach retirement, they find that they can’t claim the means-tested benefits that would have been available to them if they had not been auto-enrolled. There are still many areas that need clarification and many believe that the success of the reform will depend upon how the government tackles these issues.

It is likely that the government will place a greater emphasis on the role of employers when it comes to providing pension provision however; the exact shape of this is still to be determined. To prepare for these reforms, employers need to review the pension schemes they offer their workforce and assess if they meet the government’s proposed requirements for auto-enrolment. Another important consideration for employers is to budget ahead for these changes now and weigh up the cost implications of auto-enrolling all eligible employees into a workplace pension and contributing towards their retirement. For some organisations, the costs may be significant and they may wish to consider effective methods such as salary sacrifice to help manage the potential cost increases.

It is clear that the challenges of supporting an ageing population are here to stay, and the government will have to find solutions to encourage better workplace pension provision. However, with so much change and uncertainty around the issues of retirement and pensions, greater financial education and advice for business leaders and HR directors is needed to help them cope with the changes. Clear information is needed for employers on how they can plan ahead now and put in place the right pension provision for their business and offer their workforce the best support towards a comfortable retirement.

 Ian Bird is principal partner at Foster Denovo