Changes to the state pension age have featured in many news headlines today. The Government’s guiding principle is that people should expect to spend up to a third of their adult life in retirement. Increased life expectancy represents good news but it is not such good news (for most people!) that their working lives will expand in order to fit the Government’s ratio of two thirds adult life at work : one third in retirement.

Many people have private pension savings and some level of flexibility in terms of when that pension will come into payment. It is not therefore the case that everyone will have to work until state pension age but there will be an increased reliance on private pension savings to bridge the gap between an individual’s actual retirement and their state pension age. This gap is set to get bigger…

The current Pensions Bill puts in place reviews of the state pension age every 5 years. Today the Chancellor has said that based on the latest life expectancy figures, we can expect an increase in the state pension age to 68 in the mid 2030s and to 69 in the late 2040s.

Should employers worry about this?

We think so.

Employers (as well as pension plan members) should consider the adequacy of the pension provision that they offer – to ignore this is to store up problems for the future. Few employers would wish to be faced with an aging workforce who would like to retire but cannot afford to do so.

Employers who offer defined benefit pension plans have more to consider.

  • The pension plan will have a ‘normal retirement age’ which will be a fixed age (often 65), and this is likely to have been set with the state pension age in mind. The normal retirement age in the pension plan will not increase in line with the state pension age.
  • Some defined benefit plans offer a ‘bridging pension’, so that members who retire early can receive a higher pension from the date of their retirement to state pension age and a lower pension thereafter, to achieve a more even level of pension throughout retirement. The increase in state pension age may create an additional funding liability.
  • From 2016, state pension benefits will be reformed into a ‘single-tier’, and contracting-out on the reference scheme test basis will no longer be possible. Employers will be faced with a higher national insurance bill but may be able to make alterations to their pension plan rules to compensate for this.

All in all, the time is nigh for employers to have a fundamental rethink to ensure that their pension plan remains ‘fit for purpose’.

As we said at the top… it’s not easy!