End of retirement age is an HR nightmare

Scrapping of the default retirement age raises a number of questions

18 Feb 2011

By Anthony Harrington

A skeleton wearing a tie and sitting at a laptop computer

When the government decided to bow to the reality of increased longevity and scrap the default retirement age (DRA) in January, it took away one of the fundamental building blocks of final salary pension schemes. The DRA officially ends on 1 October this year, but transitional arrangements kick in from the start of the new tax year on 6 April, which leaves employers little time to sort out what this means to them and their occupational pension schemes.

There are a number of questions that spring up once the DRA falls away. First is the need to sort out what has to be done to bring someone’s career with a company to an end. This is only indirectly a pensions question; it is first and foremost an employment question and an HR nightmare.

It is also, rather menacingly, an employment law issue - particularly if you get it wrong - with a hearing before a tribunal on an age discrimination claim awaiting, in all probability.

This is a new problem. Until now, there simply was no issue. You could choose to allow someone to keep working beyond retirement, but they had no right of continued employment. No dismissal was necessary. Employees just went, or they asked to stay. You said yes or no, with no possible grounds for argument from the employee’s side. All that has now been swept away.

Employers can still operate a compulsory retirement age, but only if they can objectively justify it. Physically demanding jobs would be a case in point, as would physically dangerous jobs where good co-ordination and personal fitness were vital. But for most companies with white-collar employees? Forget it.

Mushy arithmetic

The next question is very much pensions-related. The concept of a “final salary” is at the heart of final salary pension schemes. Scrapping the DRA does away at a stroke with that neat point in time where you could pencil in a guestimate for Joe Blogg’s final salary. That guestimate is no longer relevant and you will have little luck trying to replace it with a question like: “When, exactly, do I think Bloggs is likely to retire?”

However, Alex Waite, partner and head of corporate consulting at actuaries Lane Clark & Peacock, counsels not to make too much of this fuzziness in end dates. In reality, it has always been difficult to work out the real value of final salary scheme liabilities since no one really knows in 2011 what salaries are going to be like in 2041. We might have near-stagnant growth for 30 years, or we might have one or more intensive bursts of high or even hyper-inflation: the outcomes for each scenario would be wildly different. Add to that the fact that people have never routinely worked until 65. They often take early retirement, which throws the numbers out.

There is somewhere to look for a test case: Waite points to the fact that the US did away with the DRA many years ago, and employers worked out how to cope there.

“My stance on this is to encourage good employers to think about how they can help their employees to retire at a realistic age. Realistic here means that you have to have performance-related criteria you can judge against,” he says.


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