What will the likely impact be of raising the retirement age on corporate performance?

20th September 2010

We are growing accustomed to the idea of employees working beyond the traditional retirement date of 65 for men, but as Delia Goldring, FSN writer and Visiting Professor in HRM at Middlesex University there are potentially disastrous unforeseen consequences for both employer and employee that make uncomfortable reading.

The Default Retirement Age for employment, (DRA), of 65 is being phased out in the UK and will be finally removed from April 2011. The removal of the DRA by government is against a background of an ageing population combined with economic restraints, in the hope that since it will allow more employees to continue working later in life the later it will be before they draw their retirement pension from the state. The aim is also to ease the strain on public finances as more people will continue to pay tax. And whilst campaigners for older workers have welcomed this removal of a fixed retirement age many employers are worried that it will complicate the job of managing a workforce and will add to overall employee costs. 

The financial implications of an ageing population are not a uniquely UK issue as Hamish McRae pointed out there are rising proportions of older people in various OECD countries. ‘Japan and Italy have the most serious problems, the US the least serious, while we in the UK are in the middle of the pack. As Japan has already experienced, a workforce that shrinks each year has to finance a retired population that rises each year. In social and human terms it is wonderful that people should live longer, but in financial terms it is a disaster. Or rather it is under the present set up. If there were no such thing as a fixed retirement age and people made their own decisions about how much they should save for retirement, either though state schemes or independently, and at what age they would retire, then the financial aspects of what is really a most welcome development – people living longer – would be fixed.’ 

As one might expect, official UK government announcements about the abolition of the DRA have all focused on how positive a move this is for employees who will ‘no longer be victims of age discrimination of compulsory retirement and that ‘they will be in charge of their own choice when to retire ……… older workers bring with them a wealth of talent and experience as employees and entrepreneurs. They have a vital contribution to make to our economic recovery and long term prosperity’. 

Currently, if an employer does not wish to retain an employee beyond the age of 65, they must follow a set retirement procedure. After April 2011 employers will no longer be able to compulsorily retire their employees and any employer who dismisses an  employee at or over 65 will have to follow a normal fair dismissal procedure based either on the capability, declining competence of the employee, conduct, redundancy, illegality or some other substantial reason. 

It will still be possible for individual employers to operate a compulsory retirement age, provided that they can objectively justify the difference in treatment on the grounds of age if they can prove that it is necessary to meet ‘legitimate employment policy, labour market or vocational training objectives, and that a compulsory retirement is an appropriate and necessary means of achieving these objectives’. A small number of employers may therefore be able to justify a compulsory retirement age for occupations, such as police, air traffic controllers, commercial airline pilots, fire fighters and other similar jobs which either demand a certain mental agility and is capable of being objectively tested or are physically demanding jobs both of which ability may decline with age. But the majority of employers will be unable to prove that they have a legitimate reason for implementing compulsory retirements. 

Campaigners for older employees have all welcomed the abolition of the DRA but these organisations and government have both neglected to mention what the impact will be on employers. Employer led organisations have mostly been negative about the change stating that the removal of the DRA has significant consequences making it difficult for companies to plan for the future and employers will need to consider how to develop and retain talented younger employees since there may be less promotion opportunities as jobs will be blocked by older employees making succession planning very difficult. 

It will be entirely up to an employee to decide when they wish to retire, and as it will basically be the same as a resignation, the amount of notice they need to give will be relatively short. Employers may find it difficult to make assumptions about when employees will leave, and when there will be a need to recruit a replacement. Although employers might ask about an employee’s retirement plans caution will be needed in case the employee argues that the employer having raised the subject is tantamount to age discrimination. These discussions would be most appropriate as part of annual reviews and addressed to all employees, rather than on an age specific basis. The employee can always change their mind until the point at which they give notice, which could make planning for succession even more complex. 

Whilst lobbying groups for older employees are celebrating their success in pushing through the legislation the impact may actually have a detrimental effect on them. Although Steve Webb, the pensions minister said: ‘By spending longer in the workforce they can also have a better pension in retirement’, a recent report from the Association of Consulting Actuaries (ACA) states that 41% of employers are ‘likely’ or ‘highly likely’ to level-down i.e. reduce future benefits in existing and in new pension schemes relative to existing ones, in order to meet the additional cost of the larger proportion of older employees resulting from the abolition of the DRA. 

Older employees may in fact therefore find that their pension benefits are reduced. Also since providers of insurance schemes mostly charge higher premiums to insure older employees, employers may need to consider how the additional costs of continuing to provide benefits for older employees, such as income protection schemes, critical illness, health and or life insurance and other benefits such as company car insurance cover may affect their business. 

Steps taken to address actual or perceived capability issues for older employees may give rise to an increase in claims for unfair dismissal as well as age and disability discrimination.  David Yeandle of the Engineering Employers Federation (EEF), said: ‘Many manufacturers will be seriously concerned about this change in policy, which will make workforce planning more difficult………’There is also a real danger that it could open a Pandora's box with the onus being placed on employers to prove whether older employees are capable of continuing in their current role. Inevitably, this could lead to employment tribunal cases from some older employees who have been dismissed rather than allowed to retire.’ 

For certain jobs, especially physically demanding ones, working beyond 65 may not be possible for all employees. While many employees over 65 are in good health, the chance of ill health issues does statistically increase with age, so employers need to ensure that they have robust sickness capability policies. Managing performance and managing ill health are nothing new but it may be harder for employers to feel confident to tackle the issue with what may be particularly long serving or senior employees. 

Some employers may find that they now have to performance manage long standing employees who they have permitted to under perform as they had been counting down to their imminent retirement. Additionally there may also be potential heath and safety issues where employees attempt to hide ill health or their decreasing dexterity, mobility or memory, in fear of being performance managed and ultimately dismissed. 

As Chris Gorman of the Forum of Private Business commented: ‘We are by no means disputing the valuable skills and experience older people bring to the workplace….. Most employees are certainly competent enough to work beyond the age of 65 without a significant deterioration in their abilities. However, for those employees not willing to leave voluntarily, there will eventually come a time when the needs of the business will have to be considered. In the absence of a default retirement age, the only viable option available to an employer is a capability dismissal based on the declining competence of the worker. We believe this would be an undignified and humiliating end to a career for most staff.’