Sting in the tale - An age-old problem
With all the fuss being made about A-day, we're in danger of ignoring another very important piece of pension legislation that is also due to be enacted in 2006. Well, it's not strictly true to say it's pension legislation, but the requirement that we fit European Union anti-age discrimination into UK law by October 2006 will obviously have a big impact on pensions, so it may as well be regarded as pension legislation. Two big pieces of legislation aimed at the pension system - the Finance Act 2004 and the Pensions Act 2004 - are going to be difficult enough, but when you add in a third biggy like anti-ageism, I think the sparks are bound to fly. The thing is, pension schemes are ageist. That's really the point isn't it?
It will be interesting to see how the government goes about implementing anti-ageism later in 2006 so that it doesn't knock down the house of pension cards it is struggling to put in place for April 2006 as the basis of our post A-day world. Employers and advisers will want to know what they can and can't do as they reshape our pension schemes to fit the post A-day model.
The worry is that our political leaders will adopt a sort of 'head in the sand' approach and just hope for the best. If that's the way it pans out, then we will simply see a succession of European Court (EC) judgments that could force us to change our pension laws piece by painful piece. It's that latter scenario that gets my vote for the most likely outcome.
The strange thing about anti-ageism is that when it relates to pensions, it's likely to be young people who will lose out. That's strange because the EU directive seems to me to be all about protecting the rights of people regardless of their age. The first common pension scheme practice that I think will get knocked on the head by the anti-ageism rules is where employers pay age-related, or even service-related, contributions on behalf of employees. It's not uncommon for employers to do this, but it just seems to be begging for an EC test case to come along, doesn't it? It wouldn't be hard to see why younger employees would feel hard done by because of their age. If a future EC judgment finds in favour of younger employees in such circumstances and rules out the use of age or service-related contributions to pensions, then employers currently doing that would have to push everyone on to the highest rate, drop everyone to the lowest rate, or work out some common compromise contribution rate somewhere in between. I doubt they would go for the first of those, so the choice looks to me like it'd be between dumbing down to the lowest level or to some compromise mid-point.
There's a bigger problem, though, and it could have a profound effect on the speed with which our current final salary pension schemes disappear. Final salary schemes have been in decline for some time and over 70% are now closed to new entrants. That's OK if you got in before the gate was shut, but for those who didn't, it's now common for them to be offered a money purchase scheme instead. It's a generalism, I know, but I would say that most employers doing this have saved on costs by offering money purchase schemes as an alternative to final salary. It won't be long before the thousands of companies in that position find that, by and large, they are providing generous final salary benefits for their older employees and comparably small money purchase scheme benefits for their younger employees. Sooner or later, someone somewhere from that younger group is likely to ask the EC whether this amounts to ageist practice. If the court agrees that it does, then employers running dual schemes in this way would have just two choices. They could either open their final salary schemes for all employees again, or they could close the final salary schemes to future benefit accrual and dump everyone in the money purchase scheme. No guesses for the way that's likely to go if it ever comes to it.
First published in Pensions Week, 9 May 2005