June 2007

Age discrimination

Uncertain times

UK pension schemes have now had several months to get used to operating in a non-age discriminatory way for benefits accruing from 1st December 2006. There was a lot of uncertainty at the end of last year, with the legislation being amended at the last minute in response to industry pressure, but has the dust now settled?

Well - yes and no. For many schemes the final legislation does allow them to operate in much the same way as before. That is, their scheme design is not age discriminatory under the legislation, because the legislation specifically exempts common scheme practices (e.g. setting minimum ages for admission, and having a maximum number of years over which a member can accrue a benefit).

But the legislation is complicated, and schemes do not know how it is going to be interpreted in practice. There is also no certainty about what will be a successful defence to an age discrimination claim. Claims can be defended if the different treatment of members of different ages can be objectively justified - i.e. it is a proportionate means of achieving a legitimate aim.

On top of this, almost all schemes are struggling to find a sensible solution to offering employees flexible retirement that does not fall foul of the anti-age discrimination legislation. A sizeable minority of schemes still have significant benefit design issues as they are unlucky enough to fall out of the list of exemptions in the legislation.

Flexible retirement

The issue of flexible retirement is a case of a good idea gone bad because of uncertainty in the legislation.

For many years pension schemes had been lobbying HMRC to be more flexible in allowing people who were winding-down to retirement to take their pension while they carried on working, often on shorter hours, or in a less demanding job. HMRC finally relented, and since April last year schemes have had flexibility to pay a pension while someone carries on working.

So far so good. But the anti-age discrimination legislation makes it difficult to offer this option to someone at e.g. age 60, and not offer it to younger people (i.e. who could take their benefits under current tax legislation from age 50). Not all employers want to offer the option to younger employees. Pensions have been designed to replace salary when someone leaves (or moves on to shorter hours) rather than as an everyday salary supplement.

Pension schemes are crying out for clarification here - whether by way of a change to the legislation, guidance from the DWP (promised earlier this year but still awaited) or a Court decision. Could employers objectively justify offering a flexible retirement option at older ages only, on the grounds it is a legitimate labour market objective to pay salary while someone is working, and pension as a replacement for salary?

Other benefit design issues

As mentioned earlier, despite there being a long list of exemptions in the legislation, there are still some key features of benefit design which don't appear to fall within them, and so need objective justification if an employer wants to continue them. These include, gifting members additional periods of pensionable service when they get to a particular age, long service requirements for benefits (over five years), and the so-called "rule of 85" where members can take an unreduced pension (often on or after age 60) when their age and service adds up to 85. This is age discriminatory, as the age at which someone can take their pension depends on their age on joining the scheme.

The Local Government schemes operate on this basis, and have proposed phasing this out over a number of years. Unison challenged the schemes arguing that the practice was not age discriminatory. The challenge has not been successful, and interestingly the Court appeared to approve the phasing-out approach.

Schemes should however keep any transition periods as short as possible.

Could the exemptions be challenged?

Although schemes are starting to get used to working within the legislation, there is a lingering question about whether the practices that are exempt from being discriminatory go too far. The EU directive the legislation is based on allows EU member states to exempt differences of treatment on grounds of age if they are justifiable within the context of national laws. Also, pension schemes are allowed to set ages for admission and entitlement to benefits, and use age related actuarial factors (so long as these are not sex discriminatory).

Pension schemes will watch with interest the Heyday (Age Concern) challenge to the Government's default retirement age of 65. Early signs from similar challenges elsewhere in Europe have been comforting to pension schemes to date. The view of the advocate general in a Spanish case about retirement clauses in collective agreements is very much that national governments have broad discretion on attaining their objectives in social and employment policy.

Let us hope then that contrary to past experience for pension schemes (thinking back to the Barber equalisation decision, and the Preston part-timers cases); Tribunals and Courts will take a practical approach to age discrimination in the pensions context, recognising the importance of allowing pension schemes to operate with certainty as they perform an important social function.

Faith Dickson
Partner
Sacker & Partners