Cost of scrapping default retirement

Employers will be faced with significant expense, following the Government announcement that it is to bring forward the review of the default retirement age. Matthew Lawrence, senior consultant from employee risks and benefits, Aon Consulting, comments: “While we have always known it would happen I would question whether this review is really needed by either employers or employees. The evidence shows that businesses are already adopting a pragmatic approach to retirement and they do not use 65 as an arbitrary way of retiring people: 81 percent of all requests to work beyond the default retirement age are accepted under the current rules, according to CBI research.

“Aon Consulting supports the notion that workers over the age of 65 can bring a significant benefit to the workplace but having a default retirement age has the advantage of giving employers a clear framework around which to make long-term plans for their workforce.
Furthermore, it enables employees to start preparing and planning for retirement. This type of flexibility suits all parties.”

Matthew adds that in all likelihood the default age will rise and he analyses the consequences: “Given existing policy commitments and the Heyday ruling, however, the reality is that the default retirement age will rise or be removed completely. “If we work on the basis that the default retirement age is to be increased to 70, Aon has calculated that this could have serious financial implications for employers who currently provide group income protection benefits through to ‘normal retirement age’. A typical large white collar organisation would, for example, expect the cost of providing that benefit to increase by at least 20 percent.

“In addition to higher benefit costs, employers may also have to factor in additional pension scheme contributions. For example, 80 percent of open private sector schemes are defined contribution based, and for these schemes the average employer contribution rate is about seven percent of salary. On top of this, employers will potentially face higher costs through the other benefits they provide, such as death in service, private medical insurance benefits, and the like. The net result is a clearly a large increase in employer costs.”

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14 July 2009