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The trm Report - June 2006 Introduction Trustees and employers may well still be reeling from the plethora of legislation included within the various Finance Acts and the Pensions Act 2004 and would, I am sure, be grateful for period of respite. Unfortunately the implications of the Employment Equality (Age) Regulations 2006, which have now been laid before Parliament, are too important and far-reaching to ignore. The regulations come into effect from 1 October 2006 and will touch upon every facet of the employer/employee relationship from recruitment to retirement and all points in between. Whilst there are specific exemptions, which will be covered later in this article, retirement and retirement benefits are affected by the regulations. It would be wise for employers and trustees to commence considered thought and engage expert advice to ensure not only compliance with the legislation but also to review the structure of their employee benefits in light of the current and future demographics of their workforce and members. Direct and indirect age discrimination will be prohibited, from 1 October 2006, unless it:
By covering both direct and indirect discrimination, the regulations ensure that both individuals and age groups cannot be disadvantaged or subject to unwanted harassment or victimisation. The regulations cover both discrimination based on an individual’s actual age or appearance of age. This need for equal treatment is applicable to both employers and scheme trustees. The context of the regulations There has been much discussion about the baby-boomer generation and the on-coming “age wave”. It should not be seen as coincidence that regulations in this area have arrived just as the first baby-boomers are starting to reach retirement age. While there can be little doubt about the direction in which the industrialised world’s demographics are heading, a few salient reminders of the general context of the workforce’s future profile may not go amiss. In its cover article of 18 February 2006, “How to manage an ageing workforce”, The Economist pointed out that over the next two decades within the EU the number of workers aged between 50 and 64 will increase by 25%. Over the same time period, the number of workers between 20 and 29 is predicted to decrease by 20%. Allied to this is the fact that employee surveys from the likes of the Employers Forum and Liverpool Victoria are consistently showing that employees in their late 50s are increasingly willing to work past the state pension age. This desire to stay active can seemingly be traced to two main factors: either the sense of self-worth engendered by their work or plain old-fashioned economics. The problematic truth is that for those not fortune enough to have a significant period of their employment covered by a final salary pension scheme, the combination of longevity, lower investment returns and poorer annuity rates does not, necessarily, add up to a palatable retirement package. Even for those in final salary schemes, the current economic climate does not lend itself to enhanced scheme benefits being used to sugar the pill of what might have been euphemistically termed ‘early retirement’ in the recent past. This combination of an ageing workforce and the seemingly inexorable shift away from a defined benefits environment is likely to have one inevitable outcome: a greater number of older workers unwilling or unable to retire before the age of 65. Retirement and Age Discrimination By definition, any arbitrary age after which all employees can be legally defined as surplus to requirements should be termed as a form of direct age discrimination. Having said this, both the preceding EU Directive and these regulations recognise the need for an exemption to allow both employer and employee to plan ahead. Therefore, the UK interpretation of the legislation allows an employer to set a default retirement age of 65 or later provided a set retirement notification procedure is followed. It follows therefore that requiring an employee to retire prior to age 65 will be treated as unfair dismissal under the regulations unless an employer can justify maintaining a contractual retirement age of less than 65. This is the first major implication in the area of pay and benefits: employers must determine what to do regarding contractual retirement ages. There are a number of options to consider:
For employers with a current contractual retirement age of 65, the natural reaction might be to breathe a sigh of relief at this point. However, simply maintaining the status quo will not obviate the need to follow the new due process. Furthermore, a fixed age may not offer the long-term solution to the changing work demographic. The flexibility to keep talented employees at work may prove as invaluable as the ability to recruit new talent in the future. Accordingly, consideration of how to deal with the issue of retirement must be a joined-up process encompassing future business needs, the discrimination legislation and the overall benefits package. Fair dismissal Retirement, subject to the aforementioned caveats, will now be an additional ‘fair reason’ to dismiss an employee under the Employment Rights Act 1996. However, a clear communication will still have to be followed within prescribed timescales. The correspondence will need to be a timely notification of the intention to retire the employee and inform the individual of their right to request to continue working. Employers have a duty to consider such requests and to respond in a timely fashion. At present, under the regulations there will no requirement for an employer to justify refusing the request. Adequate processes and monitoring systems are essential: tribunals will be empowered to provide recompense of between four and eight weeks’ earnings where an employer has not provided an employee with the appropriate correspondence within the required timescales. Service related benefits The Government was asked to provide a complete exemption for service-related benefits, but has only done so for service-related requirements not exceeding 5 years. Those exceeding 5 years will have to be justified on the basis that it reasonably appears to the employer that the service criterion fulfils a business need. The regulations do cite examples of business need, like encouraging loyalty or motivation and rewarding experience, but employers will need to construct a compelling justification now for retaining such arrangements. Pension specific exemptions Schemes are to be treated as having a non-discrimination Rule from 1 October 2006. Trustees and employers must not discriminate on grounds of age unless covered by an exemption. The stated aim of the original consultation on age discrimination was to allow pension schemes to operate broadly unchanged. Other than the issues of retirement and service-related benefits, in many respects, the exemptions for occupational schemes do generally achieve this intention.
There are also specific exemptions for occupational defined contributions schemes. Such arrangements will be allowed to have age related member or employer contribution rates where the aim is to broadly equalise the emerging benefits different ages of workers will receive. Alternatively equal rates of member or employer contributions irrespective of age will be acceptable also. One point to consider is that the regulations make reference to schemes qualifying for such exemptions provided they carry out retirement benefits activities in line with section 255 of the Pensions Act 2004. Reference should therefore be made to the DWP’s recent opinion on what it believes constitutes such activity. It is quite possible that final salary schemes which provide death benefits for non-pension members will be deemed to be carrying out activities outside of the provision of retirement benefits. The consequence might be to jeopardise or weaken a defence reliant on those exemptions. Group Personal Pensions: the black hole While some might be forgiven a wry smile, the regulations buck the trend of recent years and tend to favour occupational schemes. The only stated exemptions for GPPs relate to employer contributions. Employers will be permitted to contribute on an age-related basis. The regulations are silent in respect of minimum and maximum ages, salary levels and so forth. There is no reference to employee contributions and the assumption must be that age-related employee contributions will be deemed to be discriminatory. Curiously, unlike occupational DC arrangements, there is no specific exemption for level employer contributions regardless of age. An omission that might be exploited in future. Initial conclusions In light of these regulations a full audit of company procedures and contracts of employment will be needed. While exemptions do exist in the area of employee benefits, these are mainly restricted to occupational pension schemes. Group Personal Pensions have far fewer exemptions while group risk benefits are basically subject to the regulations in full. Employers and trustees ignore these regulations at their peril. There was a 40% jump in employment tribunals in the United States following the introduction of similar legislation while the Republic of Ireland saw a 19% rise after it legislated in line with the EU requirements. Failure to determine an adequate response could prove to be time-consuming and costly in the future. Robin Hames
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