The age from which we can draw down the State pension is soon to be increased. Notwithstanding the lack of discussion regarding the upcoming changes, this could potentially have a significant impact on employers, employees and pension schemes.

Key Dates

The State pension age is to be increased as follows:

The OECD has also expressed the view that further increases in the State pension age should be legislated for in order to link it to current life expectancy.

Employment Perspective

While there is no statutory retirement age in Ireland, many employment contracts specify a retirement date of the employee’s 65th birthday. This age is frequently chosen to coincide with the date at which employees become entitled to the State pension. In light of the upcoming changes, it is anticipated that many employees will wish to work past the age of 65 as they may not be financially able to retire at that age without the State pension. However, this may not be in line with the employer’s business objectives. 

Irish equality legislation currently permits the setting of mandatory retirement ages. Therefore, where an employment contract provides for a retirement age predating the age at which the State pension can be drawn, an employer is not required to retain the employee beyond his/her contractual retirement age. However, this does not sit well with recent EU developments, which provide that an employer must have an objective justification for setting a retirement age. Thus employers who intend to retain a mandatory retirement age should consider whether they have an objective reason for doing so. 

Pension Scheme Perspective

The majority of pension schemes also have a normal retirement age of 65 years. Consequently, the increase in the State pension age may have implications for these schemes as the trustees will be required to pay benefits in accordance with the scheme rules. Two issues which merit consideration by employers and/or trustees are (i) the normal retirement age under the scheme; and (ii) the basis upon which a member’s benefits under the scheme are determined.

– Normal Retirement Age
Where it is agreed that an employee can remain on in employment beyond his/her normal retirement age, it is important that the scheme rules cater for this. One possible solution may be to increase the normal retirement age to coincide with the increased State pension age. However, there are potential legal and contractual difficulties in adopting this approach. A more practical solution may be to leave the normal retirement age unchanged but to adapt the scheme rules, where necessary, to include suitable late retirement provisions. While this approach is certainly more flexible, it lacks certainty as regards when members will retire and is also likely to be more costly (e.g. costs will be incurred in the preparation of statements of reasonable projection etc). 

– Calculation of Benefits
The changes to the State pension age could have a significant financial impact on defined benefit (DB) schemes that (i) operate on an integrated basis; and/or (ii) offer bridging pensions.

Where a scheme operates on an “integrated benefits” structure, it generally calculates an individual’s scheme pension by using a formula which deducts a multiple of the State pension at 65 years from the member’s salary for the purpose of calculating his/her pension entitlements.  Depending on the wording of the scheme documentation, the effect of the age increase may result in the scheme being obliged to pay an “additional” amount, equivalent to the State pension payable at age 65. This is because the State pension will no longer be payable at 65 and hence the offset in the pension scheme formula will be zero. In such cases, it is possible that the scheme rules may require the scheme to make up the shortfall over the 1 to 3 year period (i.e. until the member becomes entitled to receive the State pension). However, a greater concern is that the Pensions Act prohibits trustees from reducing pensions in payment and therefore inadvertently requires that any such additional payment remain payable in perpetuity (unless the scheme rules are amended to provide otherwise). 

Some DB schemes also offer bridging pensions in circumstances where the scheme’s normal retirement age is less than 65 or on the early retirement of a member.  A “bridging pension” is an additional pension equal to the State pension and is intended to “bridge the gap” between the individual’s retirement date and the date when he/she draws down the State pension at 65 (at which stage, the bridging pension ceases to be payable). The upcoming changes pose similar issues with regard to bridging pensions, as it is feared that schemes may not only be required to bridge the gap for longer than originally anticipated, but that they may, in some instances and as a consequence of the Pensions Act, have to continue paying the bridging pension for a pensioner’s lifetime.

It is understood that the Law Society has recommended a change to the Pensions Act to prevent such unintended outcomes but, as yet, there has been no sign of any such amendment.

Comment

No doubt many employees will wish to continue working until they can draw the State pension, regardless of their contractual retirement date. As a result, employers will need to decide whether or not they will allow these employees to continue working past such date. Where employers insist on a compulsory retirement age such as 65, they should consider whether such age can be objectively and reasonably justified by a legitimate aim. If not, they run the risk of an employee challenge to the enforcement of such a retirement age.  

In any event, it is important for employers and trustees to review their scheme documentation, particularly the rules of DB schemes, to ascertain if the change in State pension age will have any adverse consequences for their scheme and to try, insofar as possible, to avoid same.  Furthermore, where an employer permits his/her employees to remain in employment beyond the scheme’s normal retirement age, the scheme rules should be checked to ensure that they cater for such circumstances.

Contributed by Lorna Osborne & Mary Greaney