The situation in Ireland today with regards to the State pension age is that it commences at age 66. This was due to change before the last election, to age 67 for people born between 1955 & 1960, and then to 68 for people born in 1961 and thereafter.
And then it became a deeply unpopular election issue and a political football. All the political parties rowed back from the proposed change, and so today the State retirement age remains at age 66 and we are all unclear as to how and when this will move going forward. What’s the issue with this? Well, the main one is that the unfunded State retirement scheme is unsustainable, as the ratio of workers to pensioners will fall dramatically in the coming decades. Future tax revenue from fewer workers will not support the higher number of pensioners receiving their benefits. The country cannot afford this burden, and this political football will have to be picked up by a future government. At some stage, you can probably expect to see State retirement ages appearing on the agenda again.
This causes an issue for employers and pension scheme trustees today. Many employers allow their employees to work until the qualifying age for the State pension (66 at the moment). However the majority of employers have their group risk cover ceasing age linked to “Normal Retirement Age (NRA)”, which was usually 65 years when schemes were established. The problem for employers and employees is that there is a gap in cover for the year 65-66 if the employee works to age 66, leaving both parties exposed. The employer may be liable should there be a death or illness claim, and this may cause an issue for Trustees too in terms of the death benefit.
The implication for the employee is that he/she or their dependants is not certain to receive the financial protection they will have assumed. This could result in significant financial hardship, or possibly an expensive legal battle. At a minimum, leaving an employee who was covered throughout their working life without cover for this final year will result in incredible ill feeling and likely hostility towards the employer, both from the employee’s family and indeed other employees within the business.
Some (particularly larger) employers may decide to cover the claim amount themselves. Of course the financial impact of this for the company will depend on the level of benefits, the employee’s salary etc. This could be a significant financial burden for the company.
The good news is though, that this can be managed relatively easily. Instead of aligning the ceasing age of your group risk scheme to NRA, it may be more prudent to align it to the current state retirement age. This will ensure there is no gap in cover for employees who work right up to that age – currently 66 years.
Another piece of good news is that amending your scheme cover in this way should not result in a major additional premium for Group Life cover. Indeed, exposure is also not as impactful for Income Protection policies as one might think. After age 65, a deferred period of 13, 26 or 52 weeks means the cover only has to be paid for a short time until the actual retirement age.
The alternative option is often not that attractive. It can be expensive to select the employees for whom employers wish to extend cover on a case-by-case basis. This option is only available for Group Life. There are many risks with this approach, as the employee would need to be fully medically underwritten in advance of being accepted. There is a possibility that there could be a gap in cover if the process is not commenced in a timely manner and there is a risk the employee may be declined cover if their medical history is impaired.
The question for policyholders to consider is whether the ceasing age for their scheme is fit for purpose. At a minimum, we believe it is an issue that warrants careful consideration, as it presents a very real threat to the future financial health of your business. And it prevents a distasteful and potentially damaging reputational issue for you.
To investigate the implications for your business and the costs involved, your starting point should be with the employee benefits consultant or financial adviser, who assisted you in establishing your risk scheme. They will guide you towards a more secure future for your business and your employees.