Ireland: Implications Of The Increase In State Pension Age

Benefit design and the change in the State pension age

In order to help address the increasing life expectancy of the Irish population and to reduce pressure on the public finances, the Social Welfare and Pensions Act 2011 provided for increases to the age at which the Old Age (Contributory) Pension (the "State Pension") is payable. The State Pension age (currently 65) is to increase to 66 years from 1 January 2014, to 67 years from 2021 and from 67 to 68 years from 2028. This change may have significant implications for private defined benefit occupational pension schemes, especially schemes with an integrated benefit design and schemes that provide bridging pensions.

Integrated and bridging pensions

A common benefit design employed in Ireland is the integration of scheme benefits payable on retirement with the State Pension (ie, the total pension package promised to members at retirement is calculated taking into account the State Pension which will also be received). Schemes with such a benefit design require particular consideration in the context of the increase in the State Pension age.

Where a scheme has a normal retirement age of 65, an increase in the State Pension age will result in a gap arising between the age at which pensions are payable from the scheme and the age at which the State Pension becomes payable. Depending on the provisions of the trust documentation, it is possible that such a scheme could be deemed liable to pay the amount that would otherwise have been payable by the State. This could potentially create serious funding difficulties for a scheme.

A similar issue arises in the context of "bridging" pensions where, on early retirement, an integrated scheme pays a higher pension to members until they reach State Pension age, at which time the temporary "bridging" pension ceases and is replaced by the State Pension. Increases to the age at which the State Pension is paid may result in such schemes having to pay the bridging amount for longer than anticipated (or funded for).

Amendments

Given the funding difficulties in many defined benefit schemes, it is unlikely that employers will be willing or able to bridge any funding gap that arises due to the changes in the State Pension age. The question that then arises for trustees and employers is whether their scheme documentation requires amendment to address these potential problems. Often a relatively straightforward way of dealing with the issue is to amend the scheme to allow integration with the State Pension without specifying the date at which the State Pension becomes payable.

It is relatively common for a scheme amendment power to contain a restriction that prevents amendments that would have the effect of reducing or negatively impacting benefits accrued to the date of the amendment. Trustees must also keep in mind their fiduciary duties to scheme members. Employers and, in particular, trustees must therefore consider (and take advice where required) whether they are permitted to make an amendment of the type outlined above.

It is arguable that trustees of an integrated scheme, in making such amendments, are complying with their fiduciary duties by securing both the benefit design and the funding model of the scheme. A scheme whose benefit design is premised on the State Pension being offset against the members' salaries on retirement would not have been funded on the basis that the scheme would be liable to pay pensions on an unintegrated basis. In agreeing to the amendment, trustees may be able to demonstrate that they are simply reflecting the original intentions of the parties and pre-empting possible future funding difficulties.

In considering whether to amend a scheme, it may also be reasonable to assume that it was not the Government's intention to undermine the benefit design of private integrated schemes by altering the State Pension age. The explanatory memorandum for the Social Welfare and Pensions Act 2011 states that these changes are needed to reduce the financial burden on the State by taking into account funding challenges associated with longer life expectancy "in line with the Government's National Pensions Framework as set out in the EU/IMF Programme of Financial Support for Ireland". That programme makes it clear that the change is designed to reduce the financial burden on the State, not to confer a windfall benefit on retiring members of pension schemes by changing integrated benefit designs.

Employment law considerations

There is no statutory retirement age in Ireland. However many contracts of employment specify a retirement age. The age of 65 is frequently chosen to coincide with the date at which employees become entitled to the State Pension. It is anticipated that many more employees will now seek to work past the age of 65 as they may not be in a position to retire at that age without the State Pension.

Despite a clear provision in the Employment Equality Acts to the effect that setting a compulsory retirement age is not age discrimination, a number of cases decided by the Court of Justice of the European Union have required employers to objectively justify their compulsory retirement age. Such cases have been followed by the Irish Equality Tribunal.

Because of this employers may be required to objectively justify their compulsory retirement age and show it had legitimate aims connected with the nature of the job and was an appropriate and necessary means to achieve those aims.

In view of the potential risks of a claim of age discrimination or unfair discrimination arising where an employer seeks to enforce its retirement age, it would be prudent for legal advice to be sought to assess the level of risks involved.

Originally published in the Irish Pensions Online Magazine, Autumn 2013.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.