On 1 January 2014, the age at which the contributory State pension comes into payment will increase from age 65 to 66. On 1 January 2021, it will rise to age 67 and on 1 January 2028 it will rise to age 68.
While there are good financial reasons for the State to increase the State pension age and, indeed, this is a trend across many European countries, the change may give rise to a number of unintended consequences for schemes which are integrated with (that is, take into account) the State pension. For example:
- A scheme’s definition of pensionable salary is basic salary with an offset of one to one and a half times the State pension payable at age 65. From the end of this year the offset will in practice be nil (because the State pension will no longer be payable at age 65) giving rise to an unfunded and unintended increase in the pension of a person retiring next year or after.
- A bridging pension, payable until “State pension age” (always intended to be age 65), will have to be paid past age 65.
- Member contributions expressed as a percentage of pensionable salary which includes an offset to take account of the State pension may unintentionally increase should that offset inadvertently become nil.
These unintended consequences may have serious financial implications for schemes. We are calling on scheme sponsors and trustees to review their scheme documents now to see if there are any unintended consequences applicable to their schemes. If there are, remedial measures may be capable of being taken – acting before the end of the year will be far preferable to waiting until next year.
Of course, the increase in the State pension age is of broader concern to employers who have contractual retirement ages. We are also urging employers to consider scheme normal retirement ages and ages at which benefits may be taken as part of a broader review of contractual retirement ages.