How to Successfully Manage Succession: The Default Retirement Age

Posted by admin at 15:51 on 13 Feb 2017

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In the UK, the need for companies to declare a default retirement age (DRA) was scrapped in October 2011, but how is this affecting businesses 18 months down the line?

Based on statistics from a recent Eversheds survey, there appears to be almost equal retrospective support both for and against the change.

Against reinstatement

Over half (53%) of respondents claimed they did not want to see the DRA reinstated, with 33% stating the legislation changing has had a positive impact on their organisation. Some of the positives have been listed below:

  • Skill retention
  • Lower training costs
  • Lower recruitment costs
  • Removal of pressure to sell a business

For reinstatement

Naturally, where there is a gain, inevitably somewhere there is a loss, and with 43% of respondents claiming they would like to see a renaissance to the days where a company was expected to operate with DRA, the numbers are significant. Here are some of the negative issues the absent law is said to be causing:

  • Career progression slowed
  • Increased time spent on performance management
  • Increased cost of benefits provisions to older employees
  • Higher overall wage costs

Bridging the gap

It is undoubtedly not as black and white as a company being solely for or against the legislation change, and it is almost certainly fair to say the average company will enjoy and endure a mixture of both the positives and negatives listed above. With that in mind, how can a company cultivate the positives whilst abating the negatives?

Consider an employee share scheme and Employee Benefit Trust (EBT)

When assessing the concerns above and drawing a comparison with the benefits of an employee share scheme or option plan, it becomes apparent how effective implementation can be.

Skill retention and higher time spent on performance management – The scrapping of the DRA has led to companies retaining key skillsets for longer, but that is no guarantee of success. It is integral for employees to remain motivated and productive. As a share plan is based on mutual success, implementation actively reinforces this concept and would hopefully serve to lower the time spent on performance management as an incentive is always in place.

Lower training and recruitment costs – With the absence of the DRA allowing employees to enjoy longer careers, it naturally lowers the cost of training and recruitment. However, beware that competitors in your field may look to recruit from your talent pool so lower training and recruitment costs are only a benefit if staff loyalty and engagement are consistently high. Under a share scheme or option plan, awards can lapse or be clawed back if an employee leaves, creating a long-term incentive for an employee to stay, with potentially prodigious collective reward.

Removal of pressure to sell a business – The scrapping of the DRA has gone some way to removing the time-related restrictions that cause added stress and weakened bargaining power when selling a business, but it can still become a protracted process. Whilst the age-related retirement date is now redundant, it is true to say that most baby-boomers do not want to work too far into their seventies. With the UK still gripped by recession, and with access to capital still restricted, fewer corporate acquisitions are transacting. A trade sale may therefore not materialise in time, even if that timeline has been extended. An Employee Benefit Trust (EBT) can be of help as a succession planning arrangement that provides a tax efficient exit for an existing shareholder and, in aggregation with an appropriate share plan, the transfer of ownership to upcoming management.

Career progression slowed – The concern amongst up and coming employees that there is no way up is a very real one that can often lead to disengagement and sometimes departure. Share option plans can meet the ownership ambition of many workers even if a leadership job role is not yet available. For this demographic, the key to successful engagement is fulfilling their desires for ownership and success. By offering options or shares it allows employers to introduce a welcome new step on the career ladder based on mutual achievement, and can remove any feelings of a lack of progression felt by employees.

Increased cost of benefit provisions to older employees and higher overall wage costs – Unsurprisingly more experienced employees offer so much to a company and feel deserving of higher reward, a sentiment that increases over time. This usually results in an increase in wages and higher pension expense. An average increase in the age of employees is also synonymous with incurrence of higher premiums for fringe benefits costs like healthcare and death-in-service insurance. However, the introduction of an employee share scheme can create extremely tax efficient rewards (in some cases a combined tax and NIC saving as high as 50.8% could be made), allowing a company to be more generous with their offer without exceeding the original economic plan. This will give companies greater control and freedom when considering their overall reward structure and ultimately see its employees better rewarded!

If you still have not amended your share plan documents to reflect the DRA change, then do not delay further!

Please note: In the cases of the Company Share Option Plan (CSOP), Share Incentive Plan (SIP), and the Save-As-You-Earn Scheme (SAYE), amendments to the plan rules require advanced approval from HMRC.

To see which share scheme or option plan may benefit your business, why not visit our fact sheet page for more information, or contact our office directly on 020 8949 5522.