CIPD response to the Department for Work and Pensions consultation
Freda Line, CIPD Adviser on Employee Relations and Diversity
The CIPD is pleased to make some observations about the practical challenges and issues that may be inhibiting progress around flexible retirement and pension arrangements.
As the UK professional body for HR professionals and other people management related professions, the CIPD is well placed to contribute to the current debate on pensions and retirement. Drawing on the experiences of our 130, 000 members, many of whom are the principal decision-makers for pensions and retirement within their organisations; our annual surveys on reward and our research on the age regulations and demographics provide a solid benchmark with which to analyse the effectiveness of Government policy in UK organisations. To complement the employer perspective, we commissioned IPSOS-MORI to undertake employee-focussed research to identify the key drivers that would encourage working beyond retirement age. Our observations are therefore drawn from both the employer and employee perspective.
While we have addressed most questions within the consultation document, we have specifically responded to Question 17 below.
The CIPD
The CIPD has played a leading role in promoting the need for employers to address age discrimination and recognise the importance of building flexibility into pension provisions as a way of opening up employment for older workers. Yet we are aware that the challenges of building flexibility into schemes which were not designed with this in mind. This can be a highly complex and time-consuming process involving costs in terms of designing and implementing new arrangements. Changes cannot be made quickly and need to be staged using interim arrangements as stepping stones.
In our view, flexibility in employment policies and practices plays an important role in resourcing organisations to sustain economic success. We therefore support flexible retirement and flexible pensions and recommend the removal of mandatory retirement as a good practice measure to enable employers to recruit and retain talent and provide individuals with greater choice in remaining in paid employment.
We recognise the linkages between flexible retirement and flexible pension arrangements. We consider that it would be helpful if further research was undertaken that could identify the barriers that are still blocking progress – whether it is employer practice or individual attitudes and expectations.
Government policy
The CIPD shares the Government’s vision for encouraging older workers to work beyond retirement age and tackling age discrimination – particularly against older workers. However, we remain sceptical whether the Government’s current policy goes far enough. Evidence based research has led us to the view that the Government should remove the default retirement age (DRA). We also believe that the Government should extend the right to request flexible working to all workers. This view is supported by findings taken from two CIPD surveys – a survey of more than 2,600 employers in October 2005 and a recent survey of 1, 000 employees, aged between 50-64 undertaken by Ipsos-MORI.
Why should the Government remove the default retirement age?
Our survey findings suggest that the demand to work beyond retirement age will increase sharply in the coming years. 36.5% of workers aged 50-54, 36.1% of 55-59 year olds and 45% of those aged 60-64 want to work past the default retirement age. Very few of our sample wished to work beyond 70.
Evidence shows that one of the major barriers to increased labour market participation of older workers is the fear that employers have about performance managing this group. Given that the UK is expected to see increasing numbers of older workers this is an issue that urgently needs addressing and the CIPD would be keen to work with Government as it looks to explore and resolve some of these concerns.
Why should the Government introduce the right to request flexible working for all?
In our recent survey, one in three of those who stated that they did not intend to work beyond retirement age said that they would be encouraged to work beyond 65 if flexible working were offered. This suggests that the number of workers wishing to work beyond 65 could be increased from 2 in 5 to more than half if there was greater flexibility. An increase of this number would go a long way to helping the Government meet its labour market participation objectives.
This finding underlines the Institute’s view that flexible working rights should be available to everybody. With the demographic situation changing, and faced with a potential situation where the UK relies less on migrant workers to fill the skills gaps; a flexible working right for everybody would make use of the skillset of older workers and remove the divisions that the existing right is creating.
Interestingly, while finance is cited as the main reason for working beyond retirement age, the main reason for higher socio-economic groups was to use skills and experience. A pension arrangement that would see workers receive all of their pension straight away and work part-time and not pay into a pension fund emerges as the most popular pension arrangement. This would also encourage continued working.
Further, as our examples illustrate, developing flexible retirement and flexible pension schemes requires significant resource – often the kind that is only available to larger organisations. We believe our recommendations would simplify matters for all employers and therefore increase the likelihood of take up from the SME community.
Individuals
Both anecdotal and survey research evidence suggests that people are not always well informed about their own pension provisions.
For example work done jointly by ourselves and the Chartered Management Institute in October 2005 shows that fewer than half of respondents in a survey on age discrimination were aware of the arrangements that had been introduced regarding the options to defer drawing the state pension as a way to acquire a lump sum or higher regular payment. This was despite Government attempts to raise awareness among employees and employers alike.
Results of a new Ipsos MORI survey specifically commission by the CIPD to help it respond to the DWP consultation shows that out of 1,000 employees surveyed between the ages of 50 and 64, 38.2% would like to carry on working once they reach 65. Other key findings are:
- Of those who do want to carry on working, the main reason is financial (67.8%), followed by a desire to use their skills and experience (52.1%), social interaction (37.7%) and self-esteem (27%). Though there are variations by social grade, for ABs the main reason is utilising their skills and experience (61.2%), followed by financial reasons (58.7%) while for DE it Is financial reasons (77.2%) followed by social interaction (42.1%).
- While 41.3% of our sample do not plan to carry on working after 65, 30.8% would consider carry on working past 65 if there were opportunities for working flexibly.
- 18.4% plan to work part time whether with their existing employer, another employer, self-employed or as a consultant.
- Overall, while 6% of those planning to work past 65 intend to work for another year, a further 50% anticipate working on between 67 and 70. 35.3% recognise they will still be working but don’t know for how long.
- 38.1% admit to not knowing how much they will receive in retirement – this includes 28.8% of ABs and 54% of DEs. Of the ‘don’t knows’, 20.7% plan to work full-time beyond 65 and 19.7% plan to work part-time.
Our findings clearly indicate that more employees would be happy to carry on working if their organisation was able to accommodate their needs for more flexible working.
We feel it is important to bear in mind that peoples’ confidence in pensions may still be influenced by the legacy of scepticism related to the failed provisions which received high profile attention in the media. The coverage damaged trust in the long term viability of pension schemes. Additionally, many people cannot afford to invest in pension provisions. For example, there has been recent publicity about the lack of take up of pensions among younger workers – many of whom have the combined budgetary pressures of student loans and housing costs. For these reasons there may not yet be a sufficient build up of interest and demand for flexible pension options and in the absence of pressure, pension fund managers may be slow to grasp the opportunities provided by the various new regulations to put in place greater flexibility both in retirement and pension provisions.
Employers
Do employers want greater flexibility?
CIPD / CMI research in 2005 explored with over 2,600 employers their expectations for future changes in policy that would encourage the recruitment and retention of older workers. Employers considered that most changes would be required in flexible and / or in retirement related policies. The survey was conducted in advance of the Age Regulations which have subsequently clarified appropriate (non-discriminatory) practice. However, it has been acknowledged that the Age Regulations may have also limited the room for manoeuvre that employers have to deliver positive older worker policies.
Our evidence shows that in 2005 many employers were already delivering flexible working practice beyond the requirements of the legislation. Many others anticipated introducing greater flexibility – which we believe has occurred since.
To encourage the recruitment and retention of older workers, by 2010:
- 23% (68%) employers wanted to introduce flexible working arrangements
- 41% (34%) wanted to give all older workers the opportunity to work part-time
- 49% (19%) wanted more flexible pension arrangements
- 33% (19%) wanted elder care leave and 31% (6%) and grandparent leave
- 32% (30%) wanted independent advice on pension and recruitment income.
This supports our case for the right to request flexible working to be offered to all.
What are the issues around flexible retirement?
Comments we have received suggest that business pressures have given employers little opportunity to tackle the issues of flexible retirement and the priority has been for HR and pension managers to address the immediate concerns raised by ‘A day’ rule changes and then the implementation of age laws.
We are aware that good practice in flexible retirement / pensions is offered by some leading employers including:
BT
Bupa
Asda
Tesco
Sainsbury’s
Marks & Spencer
Nationwide Building Society
An example of good practice
The Nationwide Building Society was one of the first organisations to introduce flexible retirement in 2001 to allow older employees to work until 70; this was extended to 75 in June 2005 and anticipated age legislation.
They argued that there were three main reasons for introducing a formal Flexible Retirement process:
- Increased flexibility around retirement, increased employee choice, contributing to an improvement in work-life balance and was consistent with organisation’s declared aim to remain an employer of choice.
- There was a demand from both managers and employees for continued employment beyond normal retirement age.
- There was a need to respond to national demographic changes in the form of an ageing population and to increasing skill shortages and recruitment difficulties. This would facilitate the retention of existing skills and experience, as well as an expanding recruitment pool.
In order to integrate with this new policy, Nationwide made a number of changes to their pension scheme. From 2 June 2005 anyone up to age 75 (previously 58) was able to join the pension scheme and once becoming a member are able to contribute until age 75 (previously 70).
With effect from 6 April 2006 (A Day), Nationwide allowed pension scheme members to draw down their accrued pension whilst remaining in employment and continuing to contribute to the pension scheme. They allow up to 4 draw downs prior to final retirement. They believe this is attractive to older workers who may be considering working part-time in the run up to retirement. To date, over 100 employees have taken advantage of this provision.
Nationwide argue that developing and implementing flexible retirement requires much time and effort. They invested heavily in developing effective communication strategies, employee consultation and the provision of ongoing support and advice to ensure the successful delivery of the policy. In addition they worked closely with their Actuary to help establish the calculation methodology, and their system administrator to ensure that functionality was in place to perform the relevant calculations. Their scheme rules have also been amended to allow for flexible retirement.
Nationwide sees the implementation of its flexible retirement policy as a process of changing corporate mindsets to an environment where age is totally irrelevant and no longer used as a way to stereotype individuals. They are doing this through a phased process of policy development and implementation. It has been Nationwide’s experience to date that flexible working practices are welcomed by, and popular with, employees and therefore as an employer have embraced flexible retirement.
However our understanding is that such exemplary good practice is very limited. We have sought the views of pension providers and the following was typical: “The universal response is that companies don't want this flexibility. It's too complex and it gives them less control over their workforce. Most have put it in deeds in case it's needed in future, but I've seen no examples of real use. The age discrimination legislation has had far more impact and the most common approach of flexibility in that is to allow a member at NRA to draw their benefit but then re-join the pension scheme as a new joiner. Typically this means a DB member drawing benefits but joining the DC scheme that exists for new hires.”
Conclusion
The CIPD supports flexible retirement and flexible pension provision. However, individuals need to be aware of the options in order to take advantage of benefits and make an informed choice. Flexible options will not be valued if individuals don’t understand the implications. This is why the CIPD strongly supports the Thorensen recommendations for greater financial education. The Institute believes that for generic financial advice to be meaningful, it should be delivered through the workplace.
The CIPD would be happy to work with Government to explore ways of highlighting the benefits of flexible retirement provision and in making the availability of flexible pensions more widespread.
We would be happy to meet with you to share our insights and these recent research findings in full.
Answers to specific consultation questions
Q1. We would welcome your views on what you believe might constitute direct or indirect age discrimination in relation to flexible retirement.
As few exemptions clearly apply to flexible retirement, employers have to fall back on the general principles of discrimination legislation to establish whether discrimination has occurred. Since age laws have been only recently introduced, there has been insufficient time for case law to develop and employers are naturally cautious. Employers prefer certainty. It would be most useful if one of the outcomes of this consultation was to provide clarification for employers. The CIPD is happy to work with the DWP to further scope and address employer concerns.
Whilst there is an exemption which allows employers to set a maximum age for joining a company's occupational pension scheme, CIPD consider that it is direct discrimination to exclude an individual from continued accrual under the company’s main (existing) pension scheme post-NPA if the NPA is below the DRA.
It may also be direct discrimination if only reduced benefit or limited pension options are offered once members reach NPA – for instance only being able to participate post-NPA or post-DRA in a less generous occupational scheme or personal pension scheme.
Due to the uncertainties of the law in this area, and the sometimes counter-intuitive results that the law gives (for instance some employers fearing discrimination claims are no longer offering flexible retirement), we anticipate that we will see discrimination claims, regardless of merit, if people are offered reduced pension benefits (for instance via a DC or stakeholder scheme rather than a DB or career average scheme) just because they have chosen or are forced to work longer. (This could apply to both existing and potential new employees.)
An issue that does not seem to have been raised in this Consultation is that it is likely to be directly discriminatory if access to flexible working options is provided only to those who are at or close to retirement and/or are drawing pension benefits. This linkage could result in claims from younger workers. For similar reasons, there might be discrimination issues with older workers if flexible working options cease beyond NPA / DRA just because they are tied to pension scheme rules.
Q3. We would welcome your views and opinions on the retention of NPA below 65. Do you believe this is critical to the workforce planning and smooth operation of pension schemes?
Pension provision
It remains unclear whether or if employers can stop people from accessing their pension if the NPA is below the DRA. If the rules of the trustees state that the NPA is 60 then it is payable from 60. However, it is our understanding that most employers are increasing their NPA to 65 in order to cut final salary pension scheme costs or to harmonise NPAs with NRAs.
One issue is the differential provision and scheme rules between sectors and within sectors. For instance, many private sector organisations operate separate schemes for their senior executive team where NPA is still below the DRA. We believe these organisations claim that this generous benefit has been put in place as a talent management tool to help ease transition.
The Institute considers that as part of this consultation the DWP should also consider the impact of the existing pensions’ regulatory framework. The current framework is prescriptive and looks to impose a ‘one size fits all’ template on pension schemes. It is also over-bureaucratic in its demand for different levels of scrutiny. An unintended consequence of this may be to limit the creative and flexible solutions that government and others are so keen to encourage.
A major concern is the potential jeopardy to existing occupational pension provision. The willingness of employers to continue to fund pensions may be threatened if pension provision becomes over-complicated.
An aspect of flexibility that should be factored into DWP consideration and discussion with HM Treasury and others is that flexible pension provision does make it more difficult for Trustees to accurately predict future impacts.
In a minority of cases there might be an issue where a NPA of below 65 could be considered justified – for instance in sports or the performing arts.
Other issues
The issue of workforce planning is and should be quite separate. It is our understanding that many private sector organisations do not carry out workforce planning (involving future projections etc) except with the senior management team. The CIPD does encourage employers to look to the future but due to business pressures many employers focus on current issues.
While the UK workforce is projected to grow, it is still projected to age. The UK continues to face long term strategic issues re pension provision and take up. The Government has already gone a long way to address this with its personal savings account proposals in the Queen’s speech of 6 November 2007. However, it could consider more proactive measures / interventions than are currently offered. At the end of the day, it must make sense to actively encourage people to join a pension scheme and to contribute for as long as it is in their interests to do so.
It is not flexibility that is the problem, but the implementation and changes required to modify existing systems – systems that were not designed to be flexible.
Q4. We also welcome your view on the operation of the DRA/NRA and NPA when flexible retirement is provided. Do you have any suggestions for change which would provide generic solutions?
The CIPD believes that in an increasingly knowledge based, service-intensive, globally competitive, 24/7 world the concept of a DRA or any mandatory retirement age is an anachronism. Age discrimination legislation now protects all employees throughout Europe there have already been challenges to the concept of a DRA and these are ongoing. The Canadian legislation has recently been amended to remove retirement age and in the UK Ministers have made statements that the UK Government is minded to do the same.
The UK Government should clearly commit to the removal of the DRA in 2011. This will provide employers with sufficient time to amend pension scheme rules and to ensure that there employment policies and practice is fully in place.
The removal of the DRA will diminish the confusion that currently surrounds pensions and retirement. If you have no set retirement (employment / contractual/ NRA) age then all employers and individuals have to do is consider the NPA.
We are aware that in some cases drawing benefits and continuing to work is not an option
Q6. What do you think are the reasons for this?
There are a number of reasons.
- Trustees think that flexibility is too complex and expensive
- Few individuals have opted to carry on working and so demand is low
- The lack of suitable alternative opportunities in organisations may hold back change – particularly when manual workers are seeking to stay on but not in their current role – perhaps a less demanding role. Employers are encouraged (in the public sector) to redeploy staff – but there is no concept of ‘reasonable adjustment’ for age onset impairments.
The number of employees within final salary (DB) schemes is predicted to continue to fall. As individuals discover that their DC scheme and / or personal saving account fails to deliver what they had expected or need, we believe it is likely that demand will grow.
In addition there are growing financial demands on younger generations – pensions may not be a priority if student debt and housing are.
Q7. How common a practice do you think this is?
Despite encouragement from CIPD, governments and others, employers argue that it is currently too administratively complex and costly to make changes to pension scheme rules and administration. We believe that employers should re-examine their position. Modern soft ware now allows a considerable degree of flexibility and there are many in-house and outsourced providers that can demonstrate that flexibility is entirely within the scope of most organisations. Recent research published by Occupational Pensions magazine in March and April 2007 gives examples of practice in this area. Research from the EFA – commissioned by the DWP itself – also evidences that employers can be flexible.
Government should commit greater resource to raising awareness of these options and actively consider how it can work in partnership with the CIPD and others to encourage a change in employer behaviour.
If the Government has not already talked to employers, then it should start with the employers already surveyed in its own research Flexible Retirement: A Snapshot of employer practice 2006. The retail banks and supermarkets were at the fore of campaigning for greater flexibility in retirement and pensions and will provide plenty of evidence of creative solutions on these issues. (See above)
Q9. What are the specific scheme rules and legislative provisions which create the problems in this area?
The implementation of two key pieces of legislation – Age Regulations and the A day rule changes within six months left many HR managers, pension managers and trustees overwhelmed. In hindsight it is clear that many pension lawyers remained unaware of the full implications of age laws until well after the 1 October 2006. The subsequent amendments to the pension-relevant elements of the Age Regulations in December 2006 have not clarified understanding. There is a continued low level of awareness of the real issues and in particular the relationship of age regulations to flexible retirement and pensions amongst the trustee community.
The CIPD is keen to partner Government in exploring these issues further and in researching what employers reactions would be to the possibility of legal requirements to offer flexibility.
Q10. Do you, as the employer, trustee or pension administrator offer the same scheme as that offered to new entrants therefore treating everyone in the same way?
As an employer, the CIPD supports flexible retirement and gives staff the opportunity to request flexible working, part-time working and phased retirements. The CIPD – in line with our public stance has responded positively to those staff who have requested to work beyond 65 (our normal retirement age) and so far have agreed in all cases. We have reviewed our pension scheme and active members can now opt to stay in the scheme and contribute to the DB scheme beyond age 65. They are also covered by death in service (DIS) and critical illness insurance arrangements. Our scheme currently allows active members to request early retirement from age 50 (actuarially reduced), although this will rise to 55 in 2010 in line with legislation.
Q12. Do you, as the employer, trustee or pension administrator allow the member who has reached their maximum number of years service permitted by the scheme to continue to accrue benefits in that scheme?
See above
Q13. Do you, as the employer, trustee or pension administrator allow them to continue to accrue up to their maximum and then be treated as above if they still have not reached NRA or above? We’d be grateful to know your reasons for your answer.
See above
Q14. What are your views on this? Is there a concern that this may continue to promote an early exit from labour market – and why?
We consider that the biggest barrier to the extension of working life and the discouragement of early exit is the retention of a mandatory retirement age. The default retirement age has
itself been adopted as a mechanism to define the end of paid employment rather than a pivotal point to consider some form of continued paid employment. As already highlighted the issues of personal appetite for pension, low financial management are also of major concern.
Q15. What are your views on not providing benefits after NPA?
An issue that this consultation fails to adequately address is the benefits related to pension provision in particular critical illness cover and death in service. It is essential that the Government recognises that employers may cease to provide these insurance / assurance related benefits to all employees if they fear claims of discrimination. Government can ill afford for employers to discontinue benefits which are key to distancing individual impact on state health provision. CIPD seeks an early assurance and clarification from Government on these concerns.
One option could be for the Government to encourage the insurance sector to highlight practice options for instance, if critical illness cover or life assurance is part of the pension scheme, then it could easily be provided on a stand - alone basis as it is under contract based DC arrangements. The consultation document acknowledges the market is already changing employer behaviour, but it seems odd that 65 is the pivotal age when average life expectancy is now mid-80s.
We are aware of an employer (700+) in the South West who was unable to get DIS cover for employees over 65. They threatened to take their custom elsewhere and the insurance company responded with an offer to provide cover till 70 at a minimal increase in costs.
Q16. Is there any evidence that if this option (allowing part benefits etc) were to be pursued further it would have a detrimental effect on the scheme provision?
Much of pension provision is based on a model of employment that no longer fully reflects the everyday experiences in the UK. Working life is much less heterogeneous than it used to be. The old patterns are breaking up and both individuals and employers are looking for greater flexibility. The introduction of career breaks, sabbaticals, extended leave and other options demonstrate that employers are aware of the need to be more accommodating and flexible to both attract and retain talent. In the future people will move into and out of employment and service much more frequently. Pension schemes must adapt to deliver benefits that are relevant to the 21st Century and so flexible pensions and retirement are positive developments and it is important the design of new schemes is based on flexibility.
Q17. Please tell us other views or suggestions which you believe should be considered?
If employees want flexibility, employers will respond – this has been the experience of employers in the past such as Marks & Spencer.
Q20. What are your views on this? Do you believe there are any occasions where it may be justifiable to not provide death benefits to employees after NPA? And why?
Employers need to be realistic and pragmatic.