12 October 2009 - Post by:Gareth Soanes
George Osborne’s announcement to the Tory party conference of a potential acceleration in the rise in the state retirement age will have set more than a few hares running. The Shadow Chancellor’s proposal is that, if the Conservatives win the next election, the age at which a man can take his state pension could rise to 66 from 65 as early as 2016.
While the direct impact of the announcement on the field of occupational pensions is likely to be limited, we can expect there to be a number of questions posed over the coming months.
Almost as soon as Mr Osborne had stepped down from the stage, in fact, one of my clients got an interesting question from a pensioner about the potential impact on early retirees, like him, whose occupational scheme pension has been “levelled” to take account of the fact that the state pension will start to be paid some time after the scheme’s early retirement pension starts.
In broad terms, where a scheme offers the levelling option, an early retiree can ask that the level of his scheme pension is supplemented temporarily up to age 65 in return for a lower pension after that age. The idea is that it will help a member to make up for the fact that he has no state pension at the start of his retirement. The net effect for him is that the overall rate of income he receives from a combination of his state pension and the occupational scheme will be more steady than it might be otherwise, while not increasing the burden on the scheme.
For someone whose pension has been adjusted in this way, the date his state pension starts is clearly important. He will be worried that a state pension age of 66 rather than 65 could mean that, from his 65th birthday (when his scheme pension drops as a result of the levelling option he chose some time ago) to his 66th birthday (when his state pension starts to be paid), the overall level of pension income he is due to receive will be lower than in any other year.
Will the scheme be required to pick up the tab for the shortfall in the member’s income? It would seem odd. The scheme certainly won’t have been funded on that basis and, in any event, it would seem unlikely that the Shadow Chancellor intends a change to the state pension age to somehow increase the burden on occupational schemes.
It will depend on the way in which the levelling option has been agreed between the member and trustees, but there is certainly a possibility that the member will face a reduction to the level of his scheme pension a year before his state pension starts to be paid.
In his speech, Mr Osborne said that “No one who is a pensioner today, or approaching retirement soon, will be affected”. It isn’t clear how far that statement will go to help members in this position. It might benefit those members who are within a short period of the current state pension age but what is the position, for example, for a member who has only recently retired early having chosen the levelling option, at age 50? He is still 15 years short of age 65; will he be treated as “approaching retirement”?
Who knows? I, for one, will be interested to see how the Shadow Chancellor’s announcement develops into policy and how it might have a consequential impact on this, as well as other aspects of occupational pension arrangements…
Gareth Soanes is an associate at Allen & Overy LLP.