Age discrimination: pensions aspects take two!

The pensions aspects of the Age Discrimination Regulations were due to come into force on 1 October 2006. However, critics argued that the age regulations and the pensions exemptions are unworkable, unclear and likely to cause pension schemes and sponsoring employers considerable difficulty and expense. In response to mounting pressure from employers and the pensions industry the Government decided to postpone their implementation until 1 December 2006 and promised to amend the age regulations.

On 11 October the draft amending regulations were published. Consultation on the draft regulations closes on 20 October 2006. The Government intends that the amendments will come into force on 1 December 2006. It will be publishing revised guidance.

This briefing note outlines the details of the draft amending regulations as well as a number of the still unresolved issues.

Age discrimination and pensions: a quick reminder

The age regulations implement an European Union (EU) Directive which prohibits age discrimination in the workplace. The age regulations will make it unlawful for:

• Occupational pension schemes to discriminate both directly and indirectly against members or prospective members on grounds of age.
• Employers to discriminate both directly and indirectly (generally, and in relation to pensions) on grounds of age. Discrimination will only be lawful where it either falls into one of the exceptions, or can be "objectively justified". For details of the original exceptions in the age regulations please see the June 2006 briefing note "Age discrimination and pensions: is 1 October 2006 another A day?".

If a discriminatory rule or practice (which does not fall into one of the exceptions) is not amended before 1 December 2006 then benefits will be automatically 'levelled up' (until the rule or practice is amended) as a result of the nondiscrimination rule to be automatically inserted into schemes.

Trustees are also given a power to amend scheme rules by resolution to ensure compliance. However, where the scheme amendment power requires employer consent, the trustees must obtain that consent otherwise discriminatory benefits will be levelled up. Where benefits have been levelled up, it will normally not be possible at a later date to level them down retrospectively.

Discriminatory rules and practices in relation to rights accrued before 1 December 2006 are unaffected.

The amending regulations: the exceptions for occupational pension schemes

The age regulations have been amended to confirm that any employer, when carrying out its functions in relation to a pension scheme, must ensure that members and prospective members are not discriminated against on grounds of age. Schedule 2 to the age regulations sets out the pensions exceptions. The amending regulations clarify how some of these exceptions will operate as well as providing new exceptions.

Examples of new exceptions are:

• Contributions to money purchase schemes: employer contributions may be limited by reference to a maximum level of pensionable pay. (See also below for clarification of an exception).
• Target benefits: different accrual rates for active/prospective members in comparable situations will be allowed provided that the aim is that they will, on retirement, get the same fraction of accrual rate as pension. This exception will apply regardless of whether members continue in pensionable service until retirement.

A scheme will, therefore, be able to provide, for example, 2/3rds final pensionable salary to executives at age 60, even if they join at different ages and accrue at different rates.

• Capped accrual: a cap (for example 2/3rds of final remuneration) on the level of benefits by reference to a fraction of pensionable pay will be lawful.
• Length of service: this exception applies both to trustees and employers. A difference in treatment between members is allowed by reference to their length of service. The difference in treatment must relate to admission, accrual and eligibility for any benefits. Where the member has more than five years' service the employer must provide a justification (that it reasonably appears to him that the difference fulfils a business need - a lower test than objective justification and borrowed from the service-related exception for employers in the provision of benefits). The trustees may also use the employer's justification.
• Minimum pension age: there can be different minimum pension ages (other than for ill-health/redundancy) for different groups or categories of members. Consent requirements generally will be lawful.
• Enhanced redundancy pensions (including enhancements given by employers) are allowed at any time, ie the requirement for the exception only to apply to existing or prospective members when the age regulations come into force has been removed.
• Sections of schemes: a new definition of section of schemes has been inserted. A section consists of groups of members defined by reference to the date they join or become eligible to join (this includes those joining as a result of a bulk transfer in or a transfer of undertakings (TUPE) transfer). The section must be closed to new members and future accruals (except where future service benefits must be provided as a result of a TUPE transfer).

Examples of clarifications are:

• Contributions to money purchase schemes: the exception in the age regulations that different rates of contributions are allowed where the aim is to make benefits "equal" or "more nearly equal" has been amended. The exception now requires that benefits payable in respect of each year of pensionable service need to meet the "equal" or "more nearly equal" test. It is not clear what this means.
• Death benefits: any death benefit may be calculated by reference to prospective service the member might have completed had he or she not died.

Pension guarantee periods (for example, the five year guarantee) will be allowed.

Young dependant reductions will be allowed provided that the reduction is calculated actuarially.

The amending regulations: the exceptions for personal pension schemes

The amending regulations provide new exceptions for personal pension schemes as follows:

• Employers may limit contributions by reference to a maximum level of remuneration.
• Employers may set a minimum age for commencement of contributions. There may be different minimum ages for different groups or categories of workers.
• Employer may make equal contributions in respect of all workers.

The amending regulations: examples of the difficulties which remain

The following are some examples of rules, practices or actions of occupational pension schemes which may still cause problems:

• 'Golden rules' of 85 etc: this is still a difficult area. Although, we consider that the early retirement pivot age exception appears to be an exception which could cover this, the Government's view seems to be that the such rules are not covered by an exception. The High Court recently dismissed a judicial review application by Unison concerning the rule of 85 in the Local Government Pension Scheme context. The court concluded that regardless of whether the rule of 85 was age discriminatory, the Government could still abolish it on grounds of cost. It is important to note that this was a judicial review application: it did not need to conclude definitively whether or not the rule of 85 is age discriminatory, although the court seemed to accept the Government's argument on this point. As things stand it looks as though these rules will have to be removed.
• Requirement that a member must leave service before drawing a pension: the amending regulations do not include an exception to deal with this. Consequently, such a rule could be indirectly age discriminatory because, based on current DTI guidance, younger members would be giving up more years of potential accrual than older members when they leave service and draw pension. We do not consider that this is a high risk area for challenge. Further department of trade and industry (DTI) guidance on this is expected.
• Flexible benefit arrangements: these are arrangements which, for example, allow members to have the option of additional employer contributions to a defined contribution (DC) scheme or as additional salary where contributions increase with age. Such cash payments are age-related and are not covered by the exceptions because the intention is not to equalise benefits. We continue to suggest that the arrangement is changed to specific age-related contributions on a detailed age-related basis and that such cash payments are discontinued. It is important to note that flexible benefits do not automatically solve a discrimination issue, although they may make the provision more difficult for an employee to mount a successful challenge.
• Sections of schemes: the amending regulations have changed the way in which the sectionalised provisions operate. Under the age regulations, it was possible for different sections of a scheme to be treated as separate schemes and for members to continue to accrue benefits in their respective sections. In contrast, the amending regulations require that before the section can be recognised as a "separate scheme" the section is closed to new members and future accruals. The amending regulations, therefore, narrow the scope of the exception. It is important to note, however, that the DWP has specifically asked for comments on the section of schemes provisions. It may be that we will see further changes in this area.
• Enhanced early retirement benefits: the amending regulations have narrowed the exception set out in the age regulations. The age regulations provided an exception for enhanced early retirement whether or not on grounds of redundancy. In contrast, the amending regulations narrow the exception by providing that enhanced early retirement may only be provided in cases of redundancy. The amending regulations also broaden the exception in the sense that all employees can continue to have enhancements on redundancy and not just existing scheme members.
• Personal pension schemes: the requirement for employers not to discriminate in relation to personal pension scheme contributions came into force on 1 October 2006. However, the exceptions for personal pension schemes are contained in Schedule 2 of the age regulations which will not come into effect until 1 December 2006. This means that contributions which may be able to benefit from the exceptions from December may be age discriminatory in the window period between October and December.

What do trustees need to do?

There are still unresolved issues surrounding age discrimination. It is important that trustees continue (if they have not already done so) with their age audit of scheme rules and practices to see whether there are any rules/practices which are age discriminatory. In addition, trustees need to speak to the employer to identify any employment practices which may need changing. However, trustees should bear in mind that the finalised regulations and DTI guidance may contain some additional changes.

Amendments to scheme rules may be necessary and it should be remembered that they normally cannot be retrospective.

Comment

Broadly speaking we welcome the amending regulations.

There are still areas where there is still a lack of clarity, but the Government has gone some way to address the concerns of the pensions industry. We should also remember that the DTI amended guidance is not due to be published until the consultation on the amending regulations has finished.

From 1 October 2006 employers have had to justify objectively a retirement age of less than age 65 and consider an employee's request to work beyond their normal retirement age. If an employer agrees to an employee's request to work beyond their normal retirement age, it is arguable that there will be no requirement for an employer to continue pension accrual for that employee until 1 December 2006. This could result in the employee falling into deferred status for example, significantly affecting their pension position. Overall the employer may be breaching its duty of good faith if it treats employees in this way due to the two months statutory gap.

We are still in the "known unknowns and unknown unknowns" territory, although overall the areas of uncertainty are now fewer. The delay does not remove the need for employers and trustees to review their scheme rules and practices to identify age-discriminatory practices in advance of 1 December 2006. Potentially, employers and trustees who do not do so will be required to objectively justify any age discriminatory practices or "level up" any age discriminatory benefits to the higher, more advantageous level which could have significant cost implications.

This briefing note is based on the Employment Equality (Age) Regulations 2006 and the draft Employment Equality (Age)(Amendment No.2) Regulations 2006 issued for consultation on 11 October 2006.