The Employment Equality (Age) Regulations came into force on 1 October 2006. However, their implementation in relation to pension schemes was delayed until 1 December 2006 and amending Regulations have been published.
The Regulations prohibit direct or indirect discrimination against an employee on grounds of age unless that different treatment can be justified as a "proportionate means of achieving a legitimate aim”.
Clearly occupational pension schemes may encounter problems under the Regulations as the benefits which they provide are based on age. While many typical occupational pension scheme provisions are specifically exempted from the legislation, inevitably, there are provisions which will be caught and which will therefore need to be reviewed. Every scheme will be treated as including a requirement that the trustees and the employer cannot discriminate against a member or prospective member of the scheme "in carrying out any of their functions in relation to it (including in particular their functions relating to the admission of members to the scheme and the treatment of members of it)".
If trustees find a discriminatory rule in their scheme they may amend or remove it (in accordance with the scheme rules) or try and objectively justify it. If scheme rules are amended, they may be amended to equalise benefits at the least favourable level for all members, although trustees need to be aware of the implications of Section 67 of the Pensions Act 1995 (i.e. the protection of subsisting rights). However, if no amendments were made to discriminatory provisions by 1 December 2006, the effect of the overriding non-discrimination rule will be to level up benefits for everyone until such time as an amendment is made. Depending on the benefits which are affected, there could be significant cost implications associated with this.
If schemes do have to make amendments to remove any age discrimination, they will have to consider whether they will need to comply with the new consultation requirements. For amendments which are effective on or after 1 December 2006, it seems unlikely that these requirements will need to be complied with as they are implementing a statutory requirement and are therefore exempt.
If trustees and employers breach the non-discrimination requirements, then members and prospective members may bring complaints to an employment tribunal or the Pensions Ombudsman.
What is allowed in occupational pension schemes?
The Regulations contain a list of typical provisions in occupational pension schemes which will not amount to discrimination which has been extended by amending legislation. The DTI have also issued a guidance note explaining how they interpret these provisions (which is also being revised by DTI).
The list of exemptions means that many common age-based provisions in occupational pension schemes should not cause problems under the new legislation. They cover:
- Where a scheme is closed or a section of a scheme is closed to members who joined after a particular date.
- Maximum and minimum ages for joining.
- The use of age-related actuarial assumptions. There will usually also be no discrimination where benefits are actuarially reduced because they are paid early or increased for being paid late. It seems that the DWP do not intend to put an unduly technical interpretation of the meaning of “actuarial” in these regulations.
- Different employer and/or member contribution rates to money purchase schemes depending on a member's age where the aim is to provide benefits in respect of comparable aggregate periods of pensionable service which are “more nearly equal”. Employer and employee contributions may also be capped.
- Age-based contributions in final salary schemes, where the accrual rate is the same for all members regardless of age and their purpose “is to reflect the increasing cost of providing the defined benefits in respect of members as they get older”.
- A minimum age at which members are entitled to payment of an early retirement pension, subject to an actuarial reduction (providing certain requirements are complied with), and a minimum age for payment of full scheme benefits without actuarial reduction. There are also provisions for enhanced early retirement benefits either where the benefit arises on redundancy or where an individual was a member or prospective member on 1 December 2006.
- There is no age discrimination where, on a member's death, there is a reduction in a pension paid to a dependant as a result of the dependant being more than a specified number of years younger than the member.
- Benefits may be calculated by reference to a member's pensionable salary (which generally increases with age). Schemes may also impose a maximum and minimum level of pensionable pay that they will take into account in calculating benefits (provided that the minimum is not above 1.5 times the Lower Earnings Limit or an amount intended to reflect basic state pension plus state second pension).
- Benefits may be calculated by reference to the length of a member's pensionable service.
- Schemes may impose a maximum number of years’ service they will take into account in calculating benefits and under the amending regulations it will also be possible to impose a maximum amount of benefits by reference to a fraction of pensionable pay (2/3rds) and as the limit does not appear to have to be restricted to benefits under one scheme, this exemption may be wide enough to accommodate a deduction in relation to “retained benefits”.
- It is also possible to impose a minimum of up to two years' service before a member qualifies for vested benefits or death benefits under a scheme.
Schemes which looked at age discrimination at a relatively early stage may need to revisit decisions which they have already taken in the light of the amending regulations. The timing of the amending regulations has in practice left schemes pushed for time.
The Regulations do not apply to benefits in respect of pensionable service before 1 December 2006, so discriminatory benefits accrued up to that date will not be affected by the new regime.
What might cause problems in occupational pension schemes?
The following are some of the issues which schemes may need to investigate further.
- Provisions which allow an employee to retire early with an unreduced pension where their age and length of service amount to a particular number (e.g. 85 or 90). (Although there have been arguments about the validity of such provisions, the recent Unison case does state that they are discriminatory but leaves open the possibility that they might be objectively justifiable).
- If a member remains in service after normal retirement age and the scheme does not provide for continued accrual or provides for different benefits.
- If a member takes scheme benefits and continues to work for the employer and is not permitted to continue to accrue benefits in the scheme on the previous basis.
- If an employer has a defined contribution scheme and a stakeholder scheme, the age-related contributions exemption which applies to the stakeholder scheme is different and looks at contributions paid in each year. Identical contribution structures could in theory therefore be treated differently.
- There is no longer an exemption for separate sections (other than closed sections) which means that if, for example, the scheme has a section only open to executives, the trustees will need to consider whether any of the other exemptions might apply or the benefits for executives are objectively justifiable.
A discriminatory practice is not necessarily unlawful if it can be objectively justified. In order to justify the use of a discriminatory provision it must be “a proportionate means of achieving a legitimate aim”. DTI guidance says in relation to objective justification that:
“legitimate aims might include business needs, efficiency, reducing staff turnover or providing promotion opportunities to retain good people.”
Trustees and employers will need to think carefully about any objective justification defence as it seems that costs alone will not be sufficient to justify a particular practice. If an individual brings a case against the trustees or an employer, it will not be possible to rely on assertions as to the justification and so it is important to keep a written record of what the legitimate aim was.
What needs to be done?
Trustees and employers should be reviewing their scheme rules now and identifying any potentially discriminatory features and looking at how they intend to deal with them.
It may be that the scope of the exemptions which we have ended up with are wide enough to cover the majority of benefits provided by occupational pension schemes and schemes will not therefore need to make significant amendments in the short term. However, there remains a possibility that the exemptions permitted by the UK
legislation go beyond anything permitted by the underlying European Directive and may therefore be held to be unlawful in the future.
This article first appeared in our Pensions update bulletin, December 2006. To view this publication, please click here to view the pdf in a new window.