Back to news 1 February 2013

Default retirement age

The default retirement age ("the DRA") was first introduced in 2006 as a lawful means for employers to compulsorily retire an employee at the age of 65 or above. Under the relevant legislation, this would not be deemed unfair dismissal or age discrimination, provided the employer followed a set retirement procedure.

However, given that people are generally living longer, the Government proposed removing the DRA because it was keen to ensure that people were not deprived of the opportunity to work simply because they have reached a particular age. The Government also commented that many people want to stay in work for reasons other than financial ones - because it gives them a sense of identity, contributes to their social network or is simply something they enjoy doing.

Following the removal of the DRA, (with effect from 6 April 2011) employers can no longer use a compulsory retirement age for their employees unless they can demonstrate that it is a "proportionate means of achieving a legitimate aim." This can be difficult to prove but, essentially, the legitimate aim of retaining a compulsory retirement age (for example, facilitation of employment planning) must outweigh the overall requirement to prevent age discrimination. Although the Government considered that occupational pension schemes would not be affected by the removal of the DRA, it has since become clear that pension schemes have needed to adapt to the new employment landscape.

For example, most occupational pension schemes currently operate with a "normal pension age" ("NPA") - often 65. Whilst the removal of the DRA for employment purposes did not remove the ability to set a NPA for pension purposes, it has meant that pension schemes have had a greater number of members who choose to work beyond the scheme's NPA and/or who wish to transition into retirement over a period of time.

In practice this means pension schemes have needed to give serious thought to benefit design for those working beyond NPA. This includes tricky questions about what benefits to provide, what contributions to require from the members and whether to allow members to draw some or all of their pension benefits, whilst they remain in employment with their employer. There has also been a financial impact on pension schemes which provide life assurance benefits (usually secured by paying premiums referable to an underlying insurance policy) because these benefits are generally more costly to provide in respect of older employees who remain in service after NPA.

The Government has emphasised that it is concerned that many people are under-saving for retirement and risk not having the income they would wish to have if they retire at the "traditional" retirement age of 65. It hopes to have addressed this issue by removing barriers to working beyond 65. This change, together with the parallel increase to state pension age seems likely to have a knock on effect on the choices members may make in relation to their private occupational pension schemes.