Date 20 December 2006
The Employment Equality (Age) Regulations 2006 (the "Regulations"), which came into force in the UK as of 1 October 2006, prohibit discrimination in the workplace on the grounds of age. The Regulations brought occupational pension schemes within their scope largely by way of exemptions applicable to certain scheme rules and practices. These exemptions were considered to be inadequate and therefore the pensions aspects of the Regulations were postponed until 1 December 2006, when the Employment Equality (Age) (Amendment No 2) Regulations 2006 (the "Amending Regulations") came into force.
The definition of discrimination on the grounds of age is the same as for any other form of discrimination, i.e. treating a person less favourably on the basis of age ("direct discrimination") or applying a provision, criterion or practice unequally to persons of different ages, but which puts a person at a disadvantage when compared to other persons ("indirect discrimination").
As of 1 December 2006 all pension schemes will be treated as containing an implied non-discrimination rule prohibiting discrimination on the grounds of age, unless an exemption applies. Additionally (unlike race and sex discrimination) both direct and indirect forms of age discrimination are allowed, provided that the discriminatory rule or practice can be objectively justified. In the absence of an applicable exemption, should an aggrieved member of a pension scheme wish to challenge a particular rule or practice, the employer or scheme trustee must objectively justify the relevant provision. If there is no such objective justification then the trustees of the scheme or the employer must take the necessary steps to amend or remove the offending rule/practice.
The Amending Regulations: Exemptions
In brief, trustees and employers must operate all schemes in a non-discriminatory fashion, unless the specific act of discrimination is either exempt, or can be objectively justified as a "proportionate means of achieving a legitimate aim". Case law will be required to clarify the concept of objective justification, but in the meantime legitimate aims are described by the DTI as including:
- business needs and efficiency.
- reducing staff turnover.
- Providing promotion opportunities to retain good workers.
In order to be proportionate, the DTI explains that "there must be a balance between the discriminatory effect of the rule or practice and the aim being pursued and a rule or measure is not proportionate if there is an alternative that would be less discriminatory".
The exemptions contained within the Amending Regulations are predominantly for "age-related" benefits. However, they do extend to "death benefits". Schemes providing "life cover only" are not exempted schemes. Other exemptions include and relate to:
- Admission to a pension scheme setting out minimum and maximum ages for admission (unless the scheme provides life cover only)
- Waiting periods for eligibility to join a scheme
- Vesting periods for employee qualification for pension and death benefits
- The use of age criteria for determining actuarial calculations;
Differing rates of member and employer contributions to a scheme based upon differing levels of a particular employee's pensionable pay
- Early retirement - permissibility of minimum age limits
- Late retirement - permissibility of maximum age limits
- Pensions payable upon redundancy - prevention of unreduced pensions to members before an early retirement 'pivot age' (being the earliest age at which age-related benefits become payable without consent and actuarial reduction)
- Ill health pensions - provision of enhanced or unreduced ill-health pensions
- Bridging pensions - no discrimination on termination at normal retirement age
- Pension increases - permissibility of different pension increases according to age or length of retirement
- Maximum length of service - permissibility of calculating benefits by use of maximum number of years service
- Employers' right to closing a particular scheme to new members on a particular date
- Cap on earnings - restriction of pension benefits by reference to maximum levels of pay
- Sectionalised schemes - each section treated as a separate scheme with differing benefits for different categories of members.
Significance of the Exemptions
The exemptions contained within the Amending Regulations give employers some flexibility in managing pension arrangements without falling foul of the Regulations. Exemptions aside, employers may also continue a discriminatory rule or practice within a scheme provided it can be objectively justified. Whilst the DTI has given some guidance on the test for "objective justification" employers should proceed with caution until case law provides further clarification on this point. Any rule of practice found to be in contravention of the Regulations is unlawful.
Validity of the Exemptions
Certain aspects of the Amending Regulations go far beyond EU legislation intended for implementation within member states (specifically in relation to occupational pension schemes and the use of age criteria for admission into a scheme; entitlement to benefits and actuarial calculations).
Any challenge of the UK's implementation of the European Employment Directive 2000/78/EC (the "Directive") could lead to the Amending Regulations being declared invalid. If the Amending Regulations were to be declared invalid, employers/trustees relying upon the exemptions contained therein would have to show that the particular rule or practice in use is either exempted by or objectively justified under the Directive.
A challenge to an exemption under the Amending Regulations is presently being considered by the European Courts, the Judgment for which is expected in early 2007. However, until such time as further clarification is provided, the Regulations and Amending Regulations must be considered properly implemented and in force within the UK.
Applicability of the Regulations, the Amending Regulations and the Schemes affected
All occupational pension schemes as defined under the Pension Schemes Act 1993 S1(1) shall be subject to both the Regulations and the Amending Regulations.
The Regulations (and therefore the Amending Regulations) do not apply to personal pension schemes, but there are certain exceptions to this principle. Employer contributions into such a scheme are caught by the Regulations (and therefore may be subject to the exemptions contained within the Amending Regulations). Other areas which could be potentially affected by age discrimination within a personal pension scheme are rights of access to a scheme and any restrictions on the grounds of age, unless they can be objectively justified. Employers must also not discriminate on the grounds of age between employees when making decisions as to whether employees are eligible to receive employer contributions or the amount of any employer contributions.
Pension arrangements made by partnerships shall be subject to the Regulations (and any exemptions contained within the Amending Regulations) where there is an occupational scheme in operation; where there is a requirement for partner to pay a proportion of their profits into a pension arrangement (be it occupational or personal); and where any payments are made by the partnership to retired partners.
Powers of amendment
Under the Amending Regulations trustees have a power to make amendments in order to comply with the non-discrimination rule. However, where employer consent to amendments is required under the terms of any scheme this must also be sought in respect of anti-discrimination amendments. Where a scheme's power of amendment is overly complicated or obtaining employer consent is likely to cause delay, trustees do not have to obtain the employer's consent for the purposes of compliance with the Regulations.
Employers and Trustees: Action to be taken
We recommend that all employers take specialist advice but we would expect the following steps to in most cases ensure compliance with the new regulations:
- Review all practices and procedures relating to the relevant pension scheme ensuring no discrimination on the grounds of age
- Review any rule practice or procedure which could amount to age discrimination to ensure that such practice/procedure is either exempted, or if not, whether or not it can be objectively justified
- Immediately stop any discriminatory practice/procedure which is not exempted and cannot be justified, so as to avoid any successful claims for age discrimination
- Operate any revision of a discriminatory practice/procedure on "the most favourable basis" i.e. level up benefits (for benefits accruing prior to 1 December 2006) and cease leveling down, unless they relate to future service or benefits.
It is important to note that the above action must have been taken by 1 December 2006 and there is no window for compliance. It is therefore prudent for all employers (individuals, partnerships and businesses) and trustees of pension schemes to seek immediate detailed advice as to the changes required and the steps to be taken in order to comply with the Regulations.
For queries relating to the above or any other related issue, please contact Chris Cook on 01727 798092 or by email at chris.cook@salaw.com.
© SA Law 2006
Every care is taken in the preparation of our articles. However, no responsibility is accepted as being owed to any person or organisation who acts on the basis of information contained in them. You should obtain specific advice in respect of individual cases.