The benefits of a default retirement ageby
Matthew Lawrence outlines his views on why the default retirement age should not be removed and warns that a change to current policy could have serious financial implications for employers.
At the outset it is important to state that workers over 65-years-old are often an invaluable resource of knowledge and experience, something sorely needed in business, particularly during these trying times. It is also worth asserting that there is no real evidence to suggest that all employers are culling their workforce at the default retirement age just because they can. The flexibility the current age regulations afford employers are a good thing, where business needs require it; and importantly where the worker wants to, there is scope for people to remain in the workplace. Where no such need exists employers can follow the retirement processes and allow workers to retire.
However, as part of a 'building society for all ages' strategy the default retirement age issue is to be reviewed in 2010, a year earlier than previously announced. In an ageing society this seems a reasonably sensible approach, but as ever it would appear that employers are going to have to bear the brunt of this. If workers remain in employment longer there will undoubtedly be additional costs in the pension and benefits arena and employers need to prepare for this.
In some quarters the announcement that the default retirement age is to be reviewed early has been warmly welcomed and whilst we have always known it would happen, I would question whether this review is really needed by either employers or workers. There is credible evidence from CBI research to suggest that businesses are already adopting a pragmatic approach to retirement and they do not use 65 as an arbitrary way of retiring people, with 81% of all requests to work beyond the default retirement age accepted under the current rules.
The view that a change to the current default retirement age is unnecessary is seemingly in the minority and subject to criticism by some commentators. In addition to the fact that we have an ageing society, the fact that too many people will not have built up a big enough pension pot in order to retire at 65 is often cited as a reason why things need to change. The argument goes that the alternative of not taking action is that people will be forced to retire into poverty, unless of course employers start increasing pension savings.
This is undoubtedly a valid argument and it is not new to contend that people are simply not saving enough for retirement; this is fact. Furthermore, it is reasonable to suggest that if the default retirement age is increased, or removed completely, workers will have the opportunity to pay into their pension for longer, thus increasing their annuity. However, even with other legislation on the horizon, for example auto-enrolment, there is no guarantee that this will result in more workers saving more for retirement.
A recent Aon Consulting survey found that a high level of working adults are currently prepared to sacrifice benefits in return for increasing their take home pay. Whether this is simply a reflection of the current economic times or more a reflection of the 'now' culture prevalent in the UK (and globally) remains to be seen. What is abundantly clear is that legislation alone will not solve the pension crisis, there is a need for improved education so workers really understand the importance of saving for retirement.
There also has to be a concern that, as ever, employers are left 'picking up the tab' for socio-political issues. Under the banner of corporate social responsibility, employers are being expected to do more not only in the pensions arena but also in the employee health arena, over and above existing health and safety legislation. Again, at a conceptual level this is right and proper but we need to be careful that we do not over burden employers with such significant increases in cost, that the law of unintended consequences means employers start reducing benefit spend in other areas. A good example of this would be group income protection benefits.
Group income protection is typically designed so that cover ceases in line with the employer’s retirement age. This is a really beneficial, but completely undervalued benefit for a worker to have as it protects them in the event that they are unable to work for an extended period due to illness or injury, in accordance with the terms of the policy contract. From an insurers' perspective, having a known end-benefit date enables them to fully understand their potential maximum exposure and price the risk accordingly.
The removal of the default retirement age could result in employers not being able to set a termination age on their insurance policy because, under the age regulations, having different terms and conditions (including benefits) on the basis of age is not allowed unless it can be objectively justified.
Insurers are unlikely to want to provide a policy without an end age and will no doubt be pushing for some form of exemption to get around this. Even if they were able to provide a policy on this basis, it is questionable as to whether employers could afford to buy the benefit. This would inevitably result in benefits either being redesigned and reduced in value or removed completely.
So whilst we could in theory be allowing workers to save more for retirement by allowing them to stay in employment longer, we could be removing their safety net in the event that they are unable to work due to illness or injury. This potentially conflicts with many of the messages and policies coming out from government regarding the role of the employer in promoting healthier workplaces.
So where does this leave us? Well, the impact of any changes to the current default retirement age need to be thought through properly. We have an ageing society and many people of working age are not saving enough for retirement. However, we need to ensure we don’t solve one problem and create others. Almost inevitably, employers will be left with much of the additional cost associated with government policy developments. They therefore need to think about the potential implications now so they are best placed to educate employees about the value of saving for the future and help make sure they have adequate protection in place.
Matthew Lawrence is a senior consultant at Aon Consulting
Click here to read an article by the chief executive of TAEN, outlining the reasons for scrapping the default retirement age.
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