Pensions hit by new age rules

SCOTS working past their retirement age may face complications if they want to keep their pension going, under rules introduced this year.

When the default retirement age ended in April, the debate centred around the implications for employment matters, particularly recruitment.

However, the considerable impact that this change would have on pensions was largely ignored; surprisingly so, given the potential effect that it may have on many people's retirement plans.

The concept of a default retirement age (DRA), at which employers may terminate employment by reason of retirement, was introduced in October 2006. The plans sparked an angry backlash and were subsequently challenged before the European Court of Justice in 2009.

That challenge was unsuccessful, but it did prompt a review by the government, and a consultation paper was published in July 2010. This led to the abolition of the DRA from 6 April this year, although the last date on which employers were able to issue employees with notices of retirement based on this was 30 March, 2011. The last date on which workers may be compulsorily retired is therefore 30 September, 2011.

It was perhaps not surprising that so little attention was paid to the implications for pensions of the abolition of the DRA. Following the consultation over the proposed change, the government issued a 16-page response in January this year. It contained two brief references to pensions, but these were revealing because the government acknowledged that concerns had been raised about how the change would affect the definition of the normal retirement age (NRA) in workplace pensions.

These pension schemes provide for employees to retire at that NRA, and in the case of a final salary scheme for a reduced pension to be payable for retirement at an earlier date. This is one of a range of age-related practices under which pension schemes operate and which are exempt from age discrimination legislation. Others include minimum and maximum ages for joining and maximum ages after which no new benefits can be built up.

One of the aims in abolishing the DRA was to enable people to continue to work for as long as they wished. It may be that employers have workforces who on average actually retire at an age later than 65, but who under the rules of their pension scheme are unable to accrue any more benefits after that date.

Although final salary scheme members should receive an actuarial enhancement to their pension for late retirement, this may prove to be less than the amount of pension they would have received for those additional years' service. Members of money purchase (defined contribution) schemes, whether an occupational, stakeholder or a group personal pension, would be doubly affected.

That's because not only would any employer contribution they had previously received have to cease, but the way in which these schemes work means that there are no enhancements payable for their late retirement.

And while scrapping the DRA may encourage more recruitment of employees over the age of 65, those people may be unable to join their employer's pension scheme and would not therefore be able to build up any pension benefits in their new employment.

This may all be less of a problem if you are only paying into a personal pension scheme. However, you should nonetheless check the terms and conditions of your pension to ensure that you can continue to pay contributions after any stated NRA.

It's also wise to check, if your employer has been contributing to your personal pension, that this arrangement will continue after the NRA and for as long as you remain in employment.

The government indicated in its consultation response that the abolition of DRA would not impact on pension schemes having an NRA, and the regulations that followed have left the exemptions for pensions from the age discrimination legislation unchanged.

This has created a somewhat unusual situation where employers can no longer specify a retirement age (unless this is reasonably justified), yet their pension schemes can and do. This inevitably poses the question as to whether "normal retirement age" in an employer's pension scheme ceases to be "normal" in the light of that employer's actual experience.

If an employer's workforce habitually retires at an average age greater than 65, then there may be a strong argument that this higher age should be substituted for the "normal retirement age". Such a move would then impact on that scheme's rules on eligibility and on the accrual of benefit.

It is conceivable that individuals could challenge employers if they have been denied the opportunity to join a pension scheme or to receive further benefits. This is particularly the case in the public sector or those larger private sector employers who still have final salary pension schemes in place.

All this of course is for the future, but in the meantime you should check whether the rules of your current occupational or personal pension scheme will allow you to continue to build up pension benefits after you turn 65, should you decide to work on after that age.

• Steven Dunn is head of pensions at Anderson Strathern solicitors