Age discrimination: yet more changes!

Summary

In response to pressure from employers and the pensions industry, the Government decided to postpone the implementation of the pensions aspects of the age regulations from 1 October 2006 to 1 December 2006 and promised to amend them.

On 11 October 2006 the draft amending regulations were published with a nine-day consultation period. The Government has now published the final version of the amending regulations. On 22 November 2006 the department for work and pensions/department of trade and industry (DWP/DTI) published the revised guidance. Consultation on this closes on 29 November 2006.

This briefing note outlines the details of the finalised amending regulations, the draft guidance as well as a number of still unresolved issues. Please see the October 2006 briefing note 'Age discrimination: pensions aspects take two!' for more details on the draft amending regulations and the June 2006 briefing note 'Age discrimination and pensions: is 1 October 2006 another A day?' for more details on the original Age Regulations and Dti guidance.

Age discrimination and pensions: a quick reminder

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.

Discriminatory rules and practices in relation to rights accrued before 1 December 2006 are unaffected. An age discriminatory rule or practice, which does not fall into one of the exemptions, in place from 1 December will result in benefits being 'levelled up' automatically (until the rule or practice is amended) as a result of the non-discrimination rule to be automatically inserted into scheme rules. Trustees are also given a power, subject to any consent requirements, to amend rules by resolution to ensure compliance. It will not normally be possible to level down benefits retrospectively.

The amending regulations: the final version

As a result of lobbying, the Government agreed to amend the pensions exemptions in the age regulations. While the first draft of the amending regulations was helpful in that it provided new and valuable exemptions as well as clarifications of existing exemptions, concerns remained about the scope of many of the changes. As a result, the final version of the regulations contains many changes from the first draft.

The final amending regulations: the exemptions for occupational pension schemes

The final amending regulations do not add many additional exemptions. Instead, they attempt to clarify existing exemptions.

The main new exemption is to allow any limitation on employer or member contributions to money purchase schemes by reference to a maximum level of pensionable pay, ie to permit capping.

• Contributions to money purchase schemes: the exemption that different rates of contributions are allowed where the aim is to make benefits "equal" or "more nearly equal" has been amended again. The exemption now requires that the amount of the age related benefit in respect of comparable aggregate periods of pensionable service needs to meet the "equal" or "more nearly equal" test. The revised guidance does not provide more help on how the "equal" or "more nearly equal" test is met. It just comments that having several age bands may not be enough.
• Length of service: the requirement that trustees may rely on the employer's business need justification has been tweaked. In particular, the employer must reply within a reasonable time to the trustees' request for confirmation that there is a business need.
• Enhanced early retirement (other than redundancy): this exemption has been re-worked so that it is confined to active and prospective scheme members on 1 December 2006 or members transferred in after that date on a bulk transfer on that basis.
• Enhanced early retirement on redundancy (under the statutory definition): this exemption now applies to all forms of scheme and not just defined benefit or defined contribution schemes.
• Bridging pensions and state scheme integration: the amendment made to this exemption ensures that provisions relating to bridging pensions and state scheme integration provisions for all members are not age discriminatory.
• Sections of schemes: a complete re-think as to how sections of schemes should be treated. The old section provisions have been removed, including the one which allowed sections to be treated as separate schemes. Instead, there is only one specific new exemption which allows section closure.

The definition of "section" has been simplified. A section is now defined as a group of members who join after a particular date on the basis particular benefits will be provided, or a group of members who joined as a result of a block transfer. There is no need for cessation of accrual in a section.

In addition to this specific exemption, the early retirement, redundancy and ill-health exemptions can be applied from different ages for different groups or categories of members.

• Life cover only schemes: these are now covered by relevant exemptions.

The final amending regulations: the exemptions for personal pension schemes

The final amending regulations include the exemptions set out in the first draft. The following is the only clarification:

• Contributions to money purchase schemes: the exemption that different rates of contributions are allowed where the aim is to make benefits "equal" or "more nearly equal" has been amended again. The exemption now requires that the amount of the age related benefit in respect of an otherwise comparable situation needs to meet the "equal" or "more nearly equal" test.

The final amending regulations: examples of difficulties which remain

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

• Sections of schemes: the final amending regulations have again changed the way in which the age requirements operate for sectionalised schemes. As commented above, the final regulations have removed the ability for different sections to be treated as different schemes. Instead, there is only the new closure exemption which specifically uses the sections terminology, although the exemptions relating to early retirement, redundancy and ill-health can operate in different ways for different groups or categories of members. Unfortunately, the revised guidance does not provide any further assistance.

The definition of section for the closure exemption is wider than that in the amending regulations. Now a section is defined in relation to the date a group of members joined (or became eligible to join) in order to receive particular benefits (or benefit from particular contribution rates) or as a result of a block transfer.

The fact that sections are not to be treated as separate schemes means that it may be more likely that a member of section A may try to mount an age discrimination claim in relation to benefits provided under section B. In this case the first line of defence would be for the employer/trustees to argue that members in the different sections are not comparable. If necessary, objective justification arguments may then need to be employed.

• Enhanced early retirement benefits: the exemption in the age regulations as originally drafted did not differentiate between ordinary enhanced early retirement and enhancements on redundancy and required that the exemption only applied for active and prospective members on 1 December 2006. The first draft amending regulations in contrast provided that enhancements could only be provided on redundancy, but it was not clear that they only related to active and prospective members. The final amending regulations have reinstated the requirement that enhancements for early retirement (other than on redundancy) only applies for active and prospective members at 1 December 2006, but that enhancements on redundancy may be provided for any member regardless of joining date. Redundancy has been restricted to the (narrow) statutory definition.

One of the ways in which the early retirement benefit may be enhanced is by reference years of prospective service up to a certain date. For most schemes this date is likely to be normal retirement date. Unfortunately, the final draft amending regulations have been redrafted in such a way that it is possible that enhancements to normal retirement date (rather than to the date on which benefits could be taken as of right) may not be possible. We consider that this is a drafting error by the Department for Work and pensions which should be corrected in due course. A similar drafting error exists in relation to the ill-health and death benefit exemption. With that in mind, an objective justification argument might be available to employers and trustees.

• Requirement that a member must leave service before drawing a pension: the final draft does not include an exemption to deal with this. Arguing that drawing a pension is a member choice may help to defend claims but at this stage this is not a watertight argument. Contrary to what we had been led to expect, the revised guidance does not provide much assistance for such cases.
• 'Golden rules' of 85 etc: this is still a difficult area. As it stands, it looks like these rules will have to be removed following the recent Unison case (although some caution is needed here because this case was a judicial review application). We recommend that the government's approach to the Local Government Pension Scheme (LGPS) reform is monitored here. For further comment on this please see the October 2006 briefing note "Age discrimination: pensions aspects take two!".

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

• Effective date for requirements to apply: the problem described in the October 2006 briefing note 'Age discrimination: pensions aspects take two!' has not been cured.
• Sections: employers may contribute at different rates to a personal pension scheme for different groups of members. An example might be where the employer is "targeting" a particular benefit level for employees who had previously been in the defined benefit scheme: the contribution rate for those members being higher than for the rest. Such arrangements do not have a "sections" exemption as for occupational pension schemes and would need to justified from 1 December 2006.

What do trustees and employers need to do?

Time is rapidly running out for trustees and schemes to comply with the age discrimination requirements. It is important that trustees continue with their age audit of scheme rules and practices to see whether there are any rules/practices which are age discriminatory. Trustees should also be speaking to employers to identify any employment practices which may need changing.

Amendments to scheme rules may be necessary. It should be remembered that such amendments cannot normally be retrospective and consultation requirements need consideration.

Comment

Broadly speaking we welcome the final draft of the amending regulations. While there are still some areas which lack clarity, many of the issues which had been raised previously have been addressed. It is unfortunate that the revised guidance is not of more assistance.

Despite the areas of concern which remain, employers and trustees need to complete their age audits as soon as possible. Potentially, employers and trustees who do not do this will be required to try to objectively justify any age discriminatory practices, or 'level up' age discriminatory benefits which could have significant cost implications. The 'liability clock' starts to run from 1 December 2006.

The DWP has confirmed to us that it will be keeping the age regulations under review to ensure both that they reflect the policy intention and that they are workable. This briefing note sets out areas where we consider there are problems for pension schemes. We will be sending a list of these to the DWP and urging them to lay further amending regulations as soon as possible after 1 December 2006.

This briefing note is based on the Employment Equality (Age) Regulations 2006 and the final version of the Employment Equality (Amendment No.2) Regulations issued on 10 November 2006.