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Care needed when dealing with retiring employees.

Employers should be preparing for the abolition of the Default Retirement Age (DRA) from October 1, 2011, which will change how they deal with people approaching retirement age from April 6, 2011, writes Ian Hill Pension Technical Manager at Torquil Clark.

Legally, employers could force an employee to retire at 65 (or any earlier age if it can objectively justify), provided they gave the employee six months notice before their retirement date. Rules being phased-in from April to October 1 mean that, from March 31, 2011, employers will no longer be able to give the six months' notice to forcibly retire employees.

There are some transition rules addressing situations where the process has already begun, but default retirement ages can only be used in cases where there is an objective justification. This test of objective justification will not be easy to pass as employers will have to show they have taken into account the nature of the business, the requirements of each employee's job, and other relevant factors backed-up with evidence when challenged.

So what should employers be addressing as employees will have the legal right to retire only when they want? There will have to be positive action by employers to terminate the employment of older workers once they can no longer rely on the default retirement age. Employers may have to take legal advice on whether, and when, to dismiss older employees, and on what grounds. They may find they have to deal with more (or different) performance or ill-health issues because their workforce has more older workers in it, or make more 'reasonable adjustments' to working terms or conditions to accommodate them. There will be additional costs for employers as, insurance and potential redundancy costs rise, and staff benefits will have to be provided to employees who remain on the books beyond the retirement age.

As well as employers, trustees of pension schemes will have to review current practices and adjust defined benefit pension schemes, to allow for more flexible retirement (although longer periods during which employees contribute to, and shorter periods during which they draw, pensions may benefit employers).

The majority of Defined Contribution members are in default funds, a large number of which are based on life-styling.

This is where a member's assets are moved progressively out of equities into more stable fixed income and cash, as the individual nears retirement, in order to prevent a large loss of savings as a result of potential stock market volatility. With the abolition of the DRA, employees are likely to work past their normal retirement age. A switch out of equities, based on a normal retirement age, will bear no resemblance to the individual's plans to retire. Default fund choices need to be revisited to understand if this will still be the right option for the scheme.

There will be an impact for Defined Benefit (DB) schemes, although to a lesser degree. Given that the scheme can retain a normal retirement age, a late retirement factor can be applied to a member's accrued benefit should they continue working beyond a scheme's normal pension age. So trustees should look to review their early and late retirement factors.

A piece of good news for employers is that the government has accepted the need for an exemption in respect of group risk insured benefits, so that these can be withdrawn from employees on reaching age 65 (which will rise in line with state pension age). However, this is of less comfort to employers who, for costs reasons, choose to self-insure. They will have to objectively justify the withdrawal of such benefits at any given age.

It is not only pensions that will have to be reviewed. Employment documentation will need to be updated. If the normal retirement age is being abandoned this will need to be removed from the employees' handbook and contracts of employment and staff notified of the change.

Pensions have been subjected to significant changes, including a reduction in the pensions annual and lifetime allowances.

The introduction of greater flexibility in the pension income drawdown regime which allows retirement savings to be taken each year rather than buy an annuity from this April, thus introducing greater flexibility in how and when pension benefits can be taken.

With the abolition of the default retirement age and the automatic enrolment of employees into qualifying pensions schemes on a staged basis, from next year, employers have very little time to prepare for the significant changes which the new regimes bring.

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Ian Hill
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Publication:The Birmingham Post (England)
Date:Jun 16, 2011
Words:754
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