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Commercial Question

Pension apprehension

updated on 25 June 2013

Question

Will we be working until we're 100?

Answer

The year 2012 did not herald the end of the world as the Mayans predicted, but in addition to Olympic triumphs, the Queen's Diamond Jubilee and the continued economic difficulties of several EU member states, we also witnessed the introduction of the automatic enrolment pension initiative.

In the United Kingdom pensions were first introduced by the state in 1908. Some theorise that this ignited private sector demand for equivalent benefits to be provided for employees. Over the course of the 20th century, pensions were used as a benefit to encourage workers to perform well. A number of paternalistic companies emerged, providing generous defined benefit schemes to their workers. Benefits were set depending on a worker's final wage and the number of years that she/he had worked for the employer. The employer was responsible for ensuring that the benefits matched the promises made to workers and, in a growing economic market, these promises were easily fulfilled.

Fast-forward to the 21st century and, following several market crashes and arguably the worst recession since the Great Depression of the 1930s, pension promises could no longer be fulfilled. Pension fund deficits troubled a number of companies and many collapsed under the pressure. Predicting this (or simply in an attempt to remain financially viable), the majority of employers ceased to offer defined benefit schemes and instead simply provided access to defined contribution schemes. However, due to the significant difference in benefit levels between these two arrangements, a worryingly large percentage of workers were not saving for retirement at all. Enter auto-enrolment.

As a result of the changes, all workers over the age of 22 with qualifying earnings must be placed into a workplace pension scheme set up by their employers. Workers may opt out of the scheme, but will find themselves re-enrolled every three years until their resolve is worn away and they remain through inertia.

This change from pensions being optional to near-enough compulsory was sparked not only by a lack of personal responsibility among workers toward saving for retirement, but also by the top-heavy population spread that is a growing problem within the United Kingdom and Europe. It is expected that the number of people over the age of 65 will rise by 50% from 2010 to 2030. With birth rates slowing dramatically over recent years, those entering the workplace now face the bleak prospect of having to support an ageing population at the end of their working lives, as well as themselves.

In response to this issue, the government has introduced some other changes alongside automatic enrolment. The state pension age (SPA) is on the increase. The Pensions Act 2011 stipulates that the SPA for women will be 65 by November 2018. This will bring it in line with the SPA for men. Both ages will then increase to 66 by October 2020. Alongside the proposed reforms for a single flat tier pension, the government has proposed granting itself the power to thereafter review the SPA every five years, with the first review to take place in 2017. This legislation is aimed at lessening the burden of the government's obligation to pay a state pension to pensioners for what could be 20, 30 or 40 years.

Any young worker should be mindful of the changes to pension laws concerning both the state changes and those that apply to the workplace. Financial stability at retirement is an issue that will concern nearly every person currently in employment or looking to enter employment, so this complicated area of law is extremely relevant. For lawyers too, pension law is relevant to areas where it initially seems as though it has no implications: family law in divorce settlements; personal injury cases where a catastrophic injury causes a significant loss in pension benefits; employment rights and unfair dismissal claims; the condition of a company's pension fund during a merger or acquisition; and property law through pension-fund-owned real estate - the list goes on.

Pensions legislation is unfortunately one of the many areas of law that is only encountered in practice rather than in the classroom. But bear it in mind as a worthy consideration, not only on a personal level for the reasons outlined above, but on a professional level as well. 

Sophie Christodoulou is a second-seat trainee at Irwin Mitchell.