Age Discrimination: Update

On 1 December 2006, the pensions provisions of the Employment Equality (Age) Regulations 2006 (the “Age Regulations”) came into force. The details of these provisions were the subject of our October Pensions Matters.

The pensions provisions were originally due to become effective on 1 October with the rest the Age Regulations. However, widespread concerns and uncertainty about some of the provisions resulted in their implementation being delayed. Following a very short period of consultation, the Government has issued further regulations, published on 10 November: the Employment Equality (Age) (Amendment No 2) Regulations 2006 (the “Amending Regulations”). These have amended the pensions provisions in the Age Regulations, and have addressed many of the earlier concerns.

However, this leaves very little time for trustees and employers to assess what impact the Age Regulations will have on their schemes, and to make any necessary changes to their scheme documentation. Remember that, from 1 December, it will be unlawful for employers and trustees to discriminate (directly or indirectly) against any member or prospective member of an occupational pension scheme on the basis of age, unless that discrimination is covered by one of the exemptions in the Age Regulations or can be objectively justified.

As recommended in our October Pensions Matters, trustees and employers should review their scheme documentation to identify any age discrimination issues. A delay in tackling such issues might result in benefits accrued on or after 1 December having to be “levelled-up” for disadvantaged members, which could be costly.

What immediate impact the Age Regulations will have on a particular scheme depends on various factors, including the nature of the benefits the scheme provides and the age profile of its membership. Where, however, any of the following points are applicable to a scheme, it may mean there is a risk of age discrimination that needs to be addressed now.

• If the scheme has a normal retirement date (“NRD”) which is lower than 65 - Employers must now allow members who wish to do so to continue working up to age 65. Not allowing such individuals to continue to accrue pension benefits or not providing them with associated benefits enjoyed by other active members will be direct age discrimination.
• If the scheme’s NRD is 65 or above, where a member wishes to continue at work beyond this date – If the employer allows this - which under the Age Regulations it does not have to - pension accrual and the provision of any associated benefits usually enjoyed by the scheme’s active members will need to continue.
• If the scheme’s rules do not allow members to draw their pension whilst still working; ie flexible retirement - The DTI indicated previously that not allowing flexible retirement could be indirect age discrimination. However, this view has been challenged by some pensions lawyers, and pending further guidance from the Government, this remains a significant area of uncertainty.
• If the scheme uses early retirement reduction or late retirement enhancement factors that are fixed (for example, an x% reduction for each year before NRD) and do not need input from the actuary - These may fall outside the relevant exemption in the Age Regulations, and so could constitute discrimination.
• If the scheme provides enhanced benefits on ordinary early retirement - Some types of enhancement are protected by an exemption in the Age Regulations, but some designs such as a “Rule of 85”, would fall outside this exemption and are likely to be discriminatory.
• If there is a waiting period of more than five years for admission to the scheme or for eligibility to certain benefits - Length of service criteria up to five years are automatically exempt but, beyond that, there is only an exemption if certain conditions are met.
• If the scheme has retained the old Inland Revenue limits on the amounts of contributions that members can pay - This may be indirectly age discriminatory. This is relevant to final salary schemes that have retained an AVC facility and to money purchase schemes.
• If the scheme has two or more sections that are open to new entrants, or the employer has more than one open scheme - Members may be able to make cross-section or cross-scheme comparisons. This is not automatically age discriminatory, but there is scope for risk.
• If members can take an unreduced pension as of right from an age which is lower than the scheme’s NRD (for example from age 60, where NRD is 65), but the scheme provides ill-health, survivor’s or redundancy benefits which allow for prospective service up to NRD. The exemption in the Age Regulations allows only prospective service up to the lower pension age (ie age 60 in the above example); allowing prospective service beyond this age may be discriminatory.

The above are some of the provisions that are most likely to give rise to age discrimination issues for occupational pension schemes generally. However, this list is not exhaustive, and there are likely to be other issues depending on the individual circumstances of the scheme in question.

If you would like Cobbetts LLP to carry out an age discrimination review of your scheme’s documentation and practices, or would like to discuss any of the issues referred to in this briefing, please contact:

Richard Shelton

Tel: 0845 404 1577

richard.shelton@cobbetts.com

The content of this briefing note is merely informative and should not be relied upon as a substitute or legal advice.

Copyright 2006 Cobbetts - All Rights Reserved - November 2006