Age old conundrum for employee benefits

The bringing forward of the review of the default retirement age raises issues for all types of employee benefits. John Greenwood reports

The financial services sector is coming to terms with the prospect of a speedier than expected removal of the default retirement age of 65. The 2006 age discrimination rules have already caused considerable difficulties for the group income protection sector, and experts are predicting the eventual removal of the longstop default retirement age will make things worse. The prospect of insuring the medical costs of a workforce whose age is uncapped will also present challenges, albeit less considerable, to PMI providers and advisers over the long term. The pensions industry, on the other hand, is presenting a relaxed front towards the proposal.

Bringing forward the review of the default retirement age by a year, Prime Minister Gordon Brown said in a strategy document on adapting to an ageing society that “evidence suggests that allowing older people to continue working, unfettered by negative views about ageing, could be a big factor in the success of Britain’s business and our future economic growth”.

With the Government in court last month against Age Concern/Help The Aged’s legal challenge to the default retirement age, it is hardly surprising that it wants to get rid of what to the public seems a counter-intuitive rule sooner rather than later. Having age discrimination rules, but only if you are young enough, isn’t a policy that is going to appeal to an ageing workforce.

Workers and employers groups’ views are not surprisingly polarised on the issue. TUC general secretary Brendan Barber says: “It cannot be right that an employer can sack someone simply for being too old. Employees should have choice – neither forced by employers to give up work, nor forced by inadequate pensions into working longer than they should.” The CBI, on the other hand, expressed disappointment at the announcement.

Group income protection providers need to make their case for special rules to protect them if the Government is not to run the risk of unintended consequences wiping out a valuable benefit currently available to many UK workers. Central to that case will be some notion of income protection running up to the date that company pension becomes available.

This tie-in with pension benefits is one reason why Dudley Lusted, head of corporate healthcare development at Axa PPP healthcare, thinks the effects of the change will not be so devastating for the group PMI sector.

Lusted says: “Most of the current generation of employees who get PMI are at the top end of the payscale. These senior managers have no intention of working beyond the age of 65 and have the pension benefits in place that mean they can afford to retire before then.

“At the more junior levels people will have to work past age 65, but are typically not getting health insurance.”
Accepting there will be some effect from the changes, Lusted believes it will be minor in the short term, and no more significant than other problems such as cancer treatment or medical inflation in the longer term.

“There will be an effect 15 or 20 years down the line when more people start finding their pensions are not enough to retire on. But we do not predict the effect to be significant,” he adds.

Pensions professionals have become used to grappling with the concept of increasing working lives for a long time, and see this change as just another stage in a process that has seen the state retirement age pushed up to 68 from 2044, women’s state retirement age rising to 65 by 2020, and the age at which benefits can be taken rising from 50 to 55 by 2010. Some in the wealth management sector will see this step as further undermining the reasoning behind a mandatory annuitisation age of 75, and many workplace pensions professionals will argue that more flexibility and less red tape are needed to bolster schemes and allow them to allow employees to at least try to be able to afford to retire.

Martin Palmer, head of corporate pensions marketing at Friends Provident says: “In deciding to bring forward a review of the ‘default’ retirement age the government is essentially signalling its approval that the age of retirement should be higher or should not exist at all. From what is currently being said about pensions, it is hard to avoid the conclusion that there is one overwhelming solution being promoted to ease the pensions crisis: delay retirement for as long as possible. The government sees working longer as inevitable.”

“The government will be hoping that state sponsored personal accounts will plug the savings gap for millions of workers who have no workplace pensions currently, but the impact of the policy on retirement incomes will be a long way off. More needs to be done now to support employers who continue to offer pensions as an employee benefit and to encourage employees who are looking for incentives to save. Flexibility not complexity should be a key characteristic of pensions and retirement”.

Pensions and group PMI may not have so much to worry about from these changes, but the group income protection sector has some important lobbying ahead.