Increases to State Pension Age
05 October 2020
As is being widely reported this morning in the national media, from today the new State Pension Age (SPA) in the United Kingdom is 66. But what does this change mean for employers?
Firstly, and importantly, it’s worth noting that the national Default Retirement Age (at which point employers used to be able to compulsory retire workers) was abolished some 9 years ago for the vast majority of employers in the United Kingdom. So it follows that changes to the State Pension Age may now have less significance for employers than it once did.
Yet this milestone should still be noted by employers, and might well act as a useful reminder to sense-check the Pension and Employee Benefits offerings provided to see that they accurately reflect the change in the date of state benefit payments for their workers.
So this post contains just a little background to the issue, together with some useful pointers for employers to consider too.
66 for now only
It’s worth highlighting that although the new State Pension Age is now 66, it won’t stay at that age for long. Indeed the current increase is part of a timetable of increases that will ensure that the SPA increases to 67, and then 68 in the years immediately ahead. And, for those interested in establishing their own State Retirement Age (SRA), there is a handy calculator available here.
So we probably need to briefly consider why the SPA is increasing at all. In essence it’s down to two key drivers; life expectancy & cost to the Treasury.
It wasn’t that long ago that life expectancy in the UK was growing at an exponential pace, and whilst that was a very good thing, it did mean the length of time that the State Pension remained in payment – and the associated costs to the national coffers – were also growing significantly too. Add to this the ageing working population of the nation, and it was clear that action needed to be taken by Government to control the costs of state pension provision. Hence the increases to the SPA.
Some might argue that at least part of the above rationale has now changed. As we explored in this post back in early March, UK life expectancy is now stalling, and possibly even decreasing in some demographic groups. And presumably COVID-19 will also add to this revised view on our collective futures.
Yet changes in life expectancy are probably outweighed by economic considerations. For it’s unlikely that there will be a change in the direction of the SPA given the spiralling costs of bankrolling the nation through the worst of the lockdown and post-pandemic economic challenges. So we should perhaps accept that increases in the State Pension Age are here to stay for the foreseeable future.
Group Personal Pension Plans
So what does the new SPA mean for employers?
The most obvious area to consider is the impact on company-sponsored pension arrangements. In particular those employers offering a Group Personal Pension (GPP) to workers should take note of the change to SPA.
Employees in such schemes may have opted for – or have been automatically defaulted into – a “lifestyle” investment fund. Such funds aim to protect the value of the pension fund as retirement age is approached, by automatically and gradually moving investments into lower risk funds as the individual gets closer to his/her selected retirement age. It follows that it is important that the target retirement age is accurate.
So from an employer’s perspective action could be required to ensure that any default fund takes into account the higher SPA where appropriate. And employees also need to be made aware of this change too. This will ensure that workers planning to retire and take benefits from both State and Private pension sources simultaneously understand that they may need to revisit their GPP selected retirement age.
Yet it’s likely that only a few workers will be aware of this need, so employers should take the time to communicate details of the new State Retirement Age, together with an outline about what action employees should take in this respect. This could perhaps be included within a wider pensions “surgery” session, to ensure that workers are kept informed of all aspects relating to their pension savings. Such surgeries – which can be delivered virtually by the Howden team – are important at any time anyway, and much more so currently given the economic and social uncertainties of the COVID-19 pandemic.
Other Employee Benefits
The change to SPA might also act as a useful reminder to employers to revisit the maximum cover age under some of their other existing Employee Benefits offerings, such as Group Life and Group Income Protection Plans.
Although many such plans now have an upper age limit higher than State Pension Age, there are likely to be a few that were set up years ago, that have not reflected the changes to either Default Retirement Age or State Pension Age. It’s obviously important that such policies are amended to reflect current practices and contractual employment promises made, so we would strongly encourage all employers to take a few minutes to check this important detail in light of today’s news.
The bottom line is that increases to State Pension Age look like they are here to stay, which will doubtless result in at least some older employers opting to stay within the workforce for longer. Prudent employers should therefore ensure that all their Employee Benefits offerings reflect this changing detail of the UK employment landscape.
For more information on any of the above topics, please speak to your usual Howden Consultant in the first instance, or visit our website for other contact options. For the latest details on COVID-19 & Employee Benefits provision please visit our coronavirus hub.
Steve is Head of Benefits Strategy, Howden Employee Benefits & Wellbeing, and is an award-winning thought leader on Pensions, Employee Benefits, and Human Resources issues. He is occasionally accused of making Employee Benefits interesting.