Compulsory retirement at 65 is abolished

Employment relations minister Ed Davey said the abolition of the default retirement age was "great news for older people, great news for business and great news for the economy".

He dismissed warnings that allowing employees of pensionable age to stay in work would make it more difficult for young people to find jobs, insisting that the change will boost the economy and enlarge the size of the labour market.

"Older workers have a lot to offer in the workplace and it's time we got rid of this outdated form of age discrimination," said Mr Davey.

"We will do all we can to support businesses with the change."

Age campaigners have long called for the abolition of the default retirement age, which fulfils a pledge in the Government's coalition agreement.

But while less than a third of firms still insist on people leaving on their 65th birthday, there are concerns among business leaders about the change.

The Institute of Directors has criticised the move - featured in both the Conservative and Liberal Democrat election manifestos - for reducing flexibility for employers.

Mr Davey said today that guidelines would make clear that employers will still be able to conduct performance appraisals and fairly dismiss staff found to be no longer capable of doing their jobs effectively.

He told BBC Radio 4's Today programme: "While there are some costs to business - and we have looked at them very carefully and listened to business - I think this is really beneficial and should not be the problem some people suggest."

There are already around 850,000 workers aged over 65 in the UK, and there is no evidence that productivity declines after that age, said Mr Davey.

"Many older people have skills and a huge contribution to make to businesses and those businesses that have got rid of fixed retirement ages find it very beneficial," he said. "They have seen it boost their business, not have a negative effect.

"People are living longer, having healthier lives and they have a lot to contribute."

Asked whether allowing older people to stay on in work would reduce the number of jobs available to younger workers, Mr Davey replied: "The opposite is the case. Because of this policy, the evidence suggests that there will be an increase in the number of workers in the workforce.

"That will boost the economy, increasing GDP, increasing tax revenue. Evidence internationally shows more people in the labour market means more activity, more income, more growth.

"Those people who seem to think there is a displacement between young people and older people are not reading the evidence and have a very old-fashioned approach to labour supply, as if there is a fixed amount of jobs in the economy. That clearly isn't the case."

Officials said the change will be phased in between April and October to allow firms to ready themselves and amend their human resources policies.

The announcement coincides with the publication today of the Pensions Bill, which includes raising the state pension age to 66, as announced by Chancellor George Osborne in last October's spending review.

Companies are also to be required to enrol their staff in pension schemes automatically, a move expected to force employers to reduce their contributions for existing members.

Pensions expert David Robertson, of the Association of Consulting Actuaries, said research indicated that many large companies were considering "levelling down" their contributions as a response to auto-enrolment.

He said: "A lot of big firms are looking at levelling down their contributions because they are looking at paying contributions for a lot more employees."

Rachel Krys, campaign director of Employers Forum on Age (EFA), said the move was a "pragmatic response to the increasing calls for change".

She said: "Business performance will improve when employees are used to their full potential, managed throughout their careers and not cast aside as they enter their 60s or encouraged to coast towards retirement.

"A new approach to retirement which enables individuals to work as long as they are making a valuable contribution, and protects employers' ability to provide insurance and benefits, is a pragmatic response to the increasing calls for change.

"Growing numbers want to and have to work beyond 65. Outdated policies which prevent this group working increase the burden on the already creaking state pension provision and ignores the fact that we are living longer and healthier lives.

"Employers without retirement ages experience a greater focus on performance, a reduction in recruitment costs and the retention of talent, whatever the age."

Today's announcement means that from April 6, employers will no longer be able to tell staff they must retire because they have reached 65. Only those who have been notified before that date - and whose 65th birthday falls before October 1 - can be forced to retire.

After October 1, employers cannot operate a default retirement age.

Individual employers will be allowed to continue to operate a compulsory retirement age for certain posts - such as air traffic controllers and police officers - if they can show that advancing age affects ability to do the job.

Labour is opposing the Bill's provision for bringing forward the increase in retirement age to 66, as well as the switch from the use of the Retail Price Index to the Consumer Price Index for the uprating of pensions.

Pensions spokeswoman Rachel Reeves said: "It is clear that on top of the VAT hike, these changes mean pensioners will be worse off next year under this Tory-led Government. Pensioners will be asking why they are having their pensions eroded when they have no responsibility for causing the financial crisis."

According to research by the Chartered Institute of Personnel and Development, more than two-fifths (42%) of workers intend to work beyond the age of 65, with most (72%) citing financial necessity as the main reason for staying on. A further 28% said the offer of more flexible working arrangements would encourage them to work on beyond the current retirement age.

CIPD public policy adviser Dianah Worman said: "Older workers want to keep working, and this desire grows as the retirement age looms ever closer.

"Much of this is due to financial reasons in these days of squeezed pensions and longer life expectancy, but these workers are also motivated by genuine commitment and enthusiasm for their work and desire to continue to contribute for their employers. Whatever the reasons, getting the most from these experienced employees should be good for business, good for the economy and good for the well-being of the workers themselves."

Meanwhile a survey of smaller firms conducted for the Federation of Small Businesses found that 70% employ staff over 50 and 25% have over-65s on the books.

FSB chairman John Walker said: "Many small business owners do not intend to retire their staff at 65 - they understand the valuable contribution and skills that older workers bring to the business.

"However, the FSB is disappointed the Government is going to press ahead and scrap the default retirement age this April. It is extremely useful for those small businesses that need it and it can stimulate discussions on future career plans and retirement. This will also add to the fears of more employment tribunals if an employer does need to dismiss an underperforming member of staff."

Chris Ball, chief executive of the Age and Employment Network, said: "Allowing exceptions for certain groups of workers - such as air traffic controllers and police officers - is unacceptable. Any use of age as a proxy for ability and competence is discriminatory and will penalise people who are perfectly able and capable to go on doing their jobs and contributing to the success of the organisations they work for.

"The Government needs to take age out of the employment equation. It's not about the date on your birth certificate; it's about whether you can do the job satisfactorily or not."

Ros Altmann, director general of Saga, said: "As the first baby-boomer has reached 65 this year and as millions more will reach that age in the next few years, the labour market has to adjust to reality.

"Most people are not old at 65 any more - they are not ready for the scrapheap, work-wise. Indeed, they still have valuable skills and experience which, if lost, would damage all our futures."

The Government's new guidelines were drawn up in consultation with employment arbitration service Acas, whose chief executive John Taylor said: "We stand ready to assist any employers who have been operating with a retirement age adapt to the change in the law."