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Changes to State Pension Age

  • Ireland
  • General

26-02-2013

What are the implications?

This year will see the end of the State pension payable from age 65. Anyone reaching age 65 after 1 January 2014 will not be entitled to a State pension until they reach age 66. The age for qualification for the State pension will move out to age 67 in 2021 and then to age 68 in 2028. 

These developments are likely to have significant consequences for employers, pension scheme trustees and workers alike.  This article highlights some of the issues which will need to be considered in terms of how the changes will impact on pension arrangements in particular, and on the workplace generally.

1.         Defined Benefit Schemes

Many defined benefit schemes currently operate on an integrated basis.  In other words, the value of the pension benefit payable from the scheme includes an offset for the pension a member will receive from the State. This is typically done by including within the definition of pensionable salary a deduction relating to the pension payable under the Social Welfare Acts.

Very often this deduction is defined either by reference to the State pension payable from age 65 or by reference to how that pension is described in the Social Welfare Acts, i.e. the State pension (transition).

Once the State pension (transition) is abolished, many such schemes will effectively become non-integrated.  In other words, the State pension offset will become nil and the pension will be based on the full value of pensionable salary.  Therefore, unless the terms of such schemes are amended to address this issue, a liability will potentially exist to pay a non-integrated pension to anyone retiring after 1 January 2014. 

To address this issue, an amendment should be made to the definition of pensionable salary to remove the link to the soon to be abolished State pension (transition) or to a State pension payable from age 65.  This should be done without delay to avoid creating pension entitlements on or after 2014 which are not intended by scheme sponsors and which trustees are unlikely to be able to honour.

2.         The Gap Issue

One issue facing employers arising from the State pension age changes is that workers may face a mis-match between their contractual pension age (usually 65) and the age at which the State pension becomes available.

Employers who choose to enforce contractual retirement ages where this issue arises risk facing possible claims for age discrimination under equality legislation. Some retiring workers may find themselves forced into bringing such claims where they have limited savings or company pension benefits to rely on pending receipt of a State pension from age 66.

These claims are liable to be successful unless employers can:

  1. establish a legitimate business aim or purpose for enforcing mandatory retirement ages, and
  2. demonstrate that the means of achieving that aim are necessary and appropriate.

To date, employers have had limited success in defending discrimination claims relating to mandatory retirement ages.

The types of defence that have been successful are where valid health and safety reasons exist for retiring someone at a specific age, particularly in the case of roles which are physically demanding based on scientific data. For public sector employers, the need to maintain a balance between the generations so as to encourage the recruitment and promotion of younger workers has been upheld as an objective justification. The need to save on costs is not a ground which can be relied upon in isolation as an objective justification in defending such claims.

For employers who do not want to run the risk of defending such claims, they could seek to alter contractual retirement ages such that they are in line with the age at which the State pension becomes payable. This will have significant implications in terms of retaining older workers in the workforce for longer than expected.  Equally, many employees who have a contractual retirement age of 65 may not be keen to remain in the workforce beyond that age. 

3.         Changes to Normal Pension Date

If employees are willing to have their retirement age linked to the age at which the State pension becomes payable then this change should be recognised for pension purposes also. This will usually mean amending the definition of normal pension date within scheme documentation.

For defined benefit schemes, this change should ease the funding burden as pensions will be payable over a retirement period which starts later in life. However, as this is an effective benefit reduction, it raises concerns for pension trustees in terms of their fiduciary responsibilities. Trustee will, therefore, need to consider any proposed change carefully notwithstanding these funding benefits.

These are issues which employers and pension trustees will have to start to grapple with soon as any solution is likely to take some time to implement within what is a limited time frame. 

Disclaimer

This information is for guidance purposes only and should not be regarded as a substitute for taking legal advice. Please refer to the full terms and conditions on our website.

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