There is increasing evidence of employers wanting to retain their older workers and workers wanting (or needing) to continue working. However, pay and benefit strategies for most employers have been designed around the probability or certainty that employees would stop work by age 65 at the latest.
This meant that pension contributions would cease and life assurance would stop when the person left employment, while other benefits had been provided (and priced) around employees stopping work altogether by then. Will this system continue to work, and serve the needs of both employers and employees in the future?
Most private sector pensions are now provided on a defined contribution basis, where the employer and employee pay a percentage of pay into the employee's pension pot. Auto-enrolment has significantly increased the numbers of employees who are now saving in these arrangements (with minimum contributions to them set to rise from April).
Employees may accumulate several pots over a working lifetime, and although there continues to be some talk about enabling consolidation on a simple and cost-effective basis, that appears still to be some way off. So they may want to continue to save for their retirement. There is more flexibility for employees with these pension pots, but it seems inevitable that there will continue to be issues unless the overall amount being saved for retirement increases substantially.
Some employers structure their pension savings around age-related contributions, but with an assumption that employees will still retire at or before age 65. If this is no longer the case, will employers have to review age-related contributions?
Life assurance cover is a relatively inexpensive benefit to provide for employees and, since age discrimination legislation was enacted, most insurers have extended the availability of coverage at ‘normal’ rates up to age 70. But what will employers do if – as seems likely – there are increasing numbers that want to work beyond that age?
There is an exemption in the law for insurance arrangements – so they do not have to be provided beyond the later of 65 and state pension age – but that does not address the issue of being able to provide a benefit that most employees will value and probably expect to continue. In such cases, employers may need to objectively justify the cut-off age they choose if they are not relying on the specific state pension age exemption under the Equality Act 2010. Otherwise, the employer may be exposed to a challenge on age discrimination from a 73-year-old employee who is not covered by an insurance benefit that the employer had continued to provide to employees up to the age of 70.
The same issues affect other benefits. Will employers continue to provide private medical insurance, critical illness cover or permanent health insurance after state pension age? More importantly, will insurers be willing to provide these at affordable rates?
Many employers provide staff with a ‘menu’ to choose from, to allow them to design a benefits package that suits their current needs – so a young single person might make different benefit choices to an employee who is married with children (who may be more likely to opt for extended private medical cover), but benefit choices may be different again for older employees and the options currently on offer may need to be reviewed.
Employers that have already committed to attracting and retaining older workers may have considered some of these issues, but we can expect the pay and reward landscape to alter to reflect the different age groups. The days of ‘one size fits all’ may be numbered for employee benefits.
Adrian Lamb is a legal director in the pensions and benefits law team at Blake Morgan