Later State pension may mean income gap for many workers

The Government plans to postpone the age at which employees get their State pension. But labour force participation by the over-65s is only about 9%, and firms have been slow to react to the change, writes FIONA REDDAN

There appears to be no sign from employers that they will raise their retirement age to correspond with the State pension age from 2014

IF PLANNING FOR your pension wasn’t painful enough already, the Government has decided to make things that bit trickier by pushing out the goal-posts for retirement. Extending the age at which you receive your State pension will, of course, reduce the State’s financial burden, but what will it mean for you? And has the strategy really been adequately thought out, given that pensioners may be expected to sign on from 2014?

To put the change in context, it is useful to remember that until 1973, the State pension age in Ireland was actually 70 and, as life expectancy increases, countries around the world are adopting a similar approach. In the UK, for example, the pension age will jump from 65 to 68 by 2020, while Australia, the US and Germany are all set to increase their pension age to 67 over the coming years.

The move means that if you were born between 1949 and 1954, you now won’t get your State pension until age 66. Similarly, those reaching the traditional retirement age in 2021 (born between 1955 and 1960) will find that they won’t get their pension until they’re 67, while those retiring from 2028 (born in 1961 or later) will have to wait until they’re 68. Who knows what the future will hold for those born more recently?

On the plus side, you will have longer to save for your pension. For example, if you were to save €500 a month from the age of 38 to 65, you would have built up a fund worth more than €200,000 by retirement, giving you a monthly income of €819. If, however, you pushed it out to 68, you would get a monthly income of €1,020.

However, this will be true only if you manage to stay in employment and earning an income; at the moment, there appears to be no sign from employers that they will increase their retirement age to correspond with the State pension age from 2014.

According to the Department of Social Protection, “both employees and employers must be encouraged to change their attitudes to working longer”, adding that “in the workplace, employers must seek to retain older employees and create working conditions which will make working longer both attractive and feasible for the older worker”.

The labour force participation rate in Ireland for people aged 65 and over is quite low at about 9 per cent, compared with 35 per cent in Iceland and more than 20 per cent in Japan – and companies don’t appear to be in a hurry to change this.

Last October, Mercer undertook a survey in which it polled employers’ responses to the new pension age. Sixty per cent reported that they had not yet considered the changes, while just 6 per cent indicated that they either had, or intended to, increase the contractual age to match the new State pension age.

For Munro O’Dwyer, a director with PwC, part of this apparent intransigence by companies is down to the fact that pension funds have other priorities at the moment, given the significant problems they face with regards to funding adequacy. Nonetheless, he adds that “we are seeing some of the larger employers begin to grapple with this”.

From an employer’s perspective, O’Dwyer argues that if a company decides in the morning to keep everyone on until 68 rather than 65, it could have some significant implications for the business, such as affecting normal staff turnover.

“If everyone stays on, you have to ask does it limit the opportunity for promotion for someone following 15 years behind them – does it create a logjam in the business?”

One solution could be to retain older employees’ knowledge by allowing them to work part-time after 65. This could be a “win-win” for both employer and employee, says O’Dwyer, in that it would allow individuals to exit the work force gradually.

Do employers really want older workers though? While some have shown themselves to be particularly adept at hiring and retaining older staff – at Marks and Spencer Ireland, for example, some 26 per cent of employees fall into the 50-plus category – others like to “refresh” their workforce, offering early retirement options for those approaching retirement age.

“That’s the perception that’s out there,” agrees Eamon Timmins, head of advocacy and communications at Age Action. He says that when companies are downsizing, they can push early retirement packages aimed at the older worker.

The new approach also does not take into account people who may be unable to work after age 65.

“All employment is different,” Timmins says. “If you’re a labourer or a miner where you’re on your feet, it may not be an option to work till you’re 65. On the other hand, professionals often work as consultants after retirement. I don’t think any two jobs are the same.”

But if, for whatever reason, you find yourself without an income after 65, what will happen in 2014? Firstly, if you are in receipt of a company pension, this will start to pay out, although you will suffer a funding shortfall for the first year in the absence of your State pension.

Pointing to the fact that upon retirement, people are entitled to a tax-free lump sum, O’Dwyer notes that people can use this to help span the funding gap.

“The current Irish structure is probably helpful in that regard. In the short term, there is probably a fix for this because of the lump-sum,” he says. However, if people are forced to spend their entire lump sum in the first three years of their retirement where they don’t get their pension until age 68, it may “need a bit more thought”, he adds.

For those without this option or whose private pension is not substantial enough, as set out by Minister for Social Protection Joan Burton, people leaving employment at 65 will be able to apply for jobseeker’s benefit, currently up to €204.30 a week, as well as other social welfare supports.

For Timmins, however, “this is offensive to people who have worked all their lives”, adding that it may create a “poverty trap” for those who may effectively be turfed out of their employment at 65, but who are unable to access the State pension for up to another three years. While they may be entitled to their occupational pension at 65, this may not be sufficient to survive on.

The law may not protect older workers who want to stay in employment. The Employment Equality Act 1998, for example, allows Irish employers to set a compulsory retirement age for their employees; to date, there has been no discussion that would allow employees to work until 66 or later.

It is likely though, that as the pension age increases, cases from employees who want to stay working longer but who may be precluded from doing so due to the constraints of their employment contract will reach the courts.

“There will definitely be pressure from the workforce at large,” says O’Dwyer. “Already we can see more and more age discrimination cases in the UK. It is an area that will be challenged over the next 10 years.”

While Brendan McGinty, director of industrial relations and human resource services at Ibec, asserts that it is “not a clear picture yet”, he suggests it would be helpful if there was some clear guidance around how companies can set retirement ages.

“Otherwise the only way to find out for certain is by forcing retirement age and it going to the Labour Court,” he says, adding that the issue is capable of being dealt with “in a planned and sensible way”.

“One of those ways to ensure that an employer can mount an appropriate defence of retirement age is to have some definition so that everyone can be clear about rules around that,” McGinty adds.