LONDON, 20 November 2006 – Changes to age discrimination legislation could force many companies to costly rearrangements of pension schemes if they are to avoid breaking the law. Companies with defined contribution (DC) schemes that do not allow members to set their own target retirement age if a lifestyle investment option is offered could be particularly prone to such changes, according to research out today from Aon Consulting, a leading pensions, benefits and HR consultancy.

Aon’s research reveals that although 90% of DC schemes offer at least one investment lifestyle option, 45% of trust-based schemes still don't allow members to choose their target retirement age.  Aon believes that this could potentially lead to the majority of members in these DC schemes not being able to benefit from the safety element a lifestyle investment strategy offers if they choose to retire at an age other than the target age set by their pension scheme. 

Paul Macro, head of Defined Contribution at Aon Consulting, said: “Under new age discrimination legislation, not allowing scheme members the flexibility to set their own target retirement age could potentially be illegal.  Companies need to think more about the impact of how this new legislation will impact on their pension schemes to ensure that they do not fall foul of this new legislation.“

Lifestyle investment options are automatic processes that change a member’s investment options depending on their age.  This would include investment strategies that are geared toward growth in the early to middle part of a person’s career before switching more towards ‘safer’ investment options as members approach their retirement age to protect their savings.  Aon’s research also highlighted that 62% of the arrangements surveyed now also offer more than one lifestyle investment option. 

Aon found that most organisations now recognise that shorter pre-retirement ‘safe’ investment periods are more beneficial to members than longer ones.  Reflecting this, 37% of the companies surveyed offer a five-year switching period with 26% offering a ten-year switching period reversing the position from a similar survey last year.

Macro added: “The offering of more than one lifestyle option reflects the growing realisation that ‘one size does not fit all’ when it comes to pension schemes.  Variations around the level of risk that members are willing to take in the growth stage, and the different income options now available apart from buying an annuity mean that multiple options have to be given.

“Additionally, the trend towards reducing the periods of ‘safe’ investment strategies is part of a realisation from companies that the annuity matching element of lifestyle is either not as necessary as it might have been thought in the past or the potential lost returns of switching out of growth assets early are too great.  This trend again reflects the changing market.”   

Notes to editor:

Aon’s latest DC research was carried out during the first half of 2006.  The survey was conducted amongst 170 DC pension schemes in total.  Of this, 25%  (43) were trust based occupational schemes, and 75% (127) were contract based occupational schemes.

About Aon Consulting

Aon Consulting is a leading human capital consultancy, helping organisations of every size to attract and keep the employees they need. We advise on all aspects of employment, including health-related insurance and risk; employee compensation and pensions; human resource strategy planning; job design and change management; and staff assessment and legal issues. Aon Consulting is a division of Aon, one of the UK’s largest insurance brokers and providers of risk management services and a major force in reinsurance and the UK human capital consulting market.  Aon Consulting Limited is authorised and regulated by the Financial Services Authority.

About Aon

Aon Corporation is a leading provider of risk management services, insurance and reinsurance brokerage, human capital and management consulting, and specialty insurance underwriting. There are 46,000 employees working in Aon's 500 offices in more than 120 countries. Backed by broad resources, industry knowledge and technical expertise, Aon professionals help a wide range of clients develop effective risk management and workforce productivity solutions.

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