04/06/09 Age Discrimination and Flexible Retirement
04 June 2009
In response to their earlier consultation paper on this topic in the context of pension provision (Oct 2007) the DWP have published a paper entitled “Flexible Retirement and Pension Provision”. This paper proposes two options on how legal queries in this area may be handled in the future and outlines two sets of draft regulations.
The Meaning of Flexible Retirement
Flexible retirement in the pensions context has the following meanings:
-allowing members to take all or part of their pension and associated lump sum whilst continuing to work ( permitted since 6 April 2006); and
-allowing members to work until 65 (the default retirement age) where a scheme’s Normal Retirement Date is below 65 unless the employer can objectively justify compulsory retirement before that date, or permitting members to work past 65.
The Government acknowledges in their latest response that confusion remains in the pensions industry and amongst employers as to what might be discriminatory or acceptable practice in the context of flexible retirement provision. The Government wishes to encourage the provision of flexible retirement whilst at the same time supporting the existence of occupational pension schemes.
The Relationship between Normal Pension Age (“NPA”), the Default Retirement Age (“DRA”) and the Normal Retirement Age (“NRA”)
Presently there is uncertainty as to how the legislation works with employees who are entitled to take an actuarially unreduced pension at an age (NPA) which is earlier than the minimum age at which they can be legally dismissed on the basis of retirement (DRA), or their NRA if this is higher than the DRA.
Employers can retire employees aged 65 or over (the DRA is 65) without this being age discrimination. However, if an employee has a NRA which exceeds the DRA, dismissal before the NRA may well be unfair.
If the NRA is below 65, dismissal below 65 may be directly discriminatory, but employers may be able to objectively justify their actions.
The average NPA in occupational pension schemes is below 65. The vast majority of Occupational Pensions Schemes allow individuals to retire after NPA – this constitutes flexible retirement.
Death in Service Benefits
There is also concern that a survivor of a member in a flexible retirement arrangement may be entitled to benefits that would normally accrue in respect of an active member and those that would accrue in respect of a pensioner member. It is recognized by the Government that this could cause real detriment to occupational pension schemes.
The Way Forward
The DWP response – “Flexible Retirement and Pension Provision” sets out a further consultation period ending on the 10 March 2009 and seeks comments on two options and respective draft legislation relating to each of the options.
Both options refer to “flexible retirement arrangements” a term defined as an arrangement between a member and the employer under which the member either:
-reduces hours worked, or
-grade held, after becoming eligible to receive all or part of the age related benefits under an occupational pension scheme.
Option 1
This option if applied will add a wide statutory exemption, for all pension rules and practices linked to flexible retirement arrangements. This would render lawful any decision of an employer or a trustee or a manager of an occupational pension scheme that halted the accrual of or entitlement to any further rights of benefits under the scheme during the flexible retirement arrangement.
Employers or Trustees or Managers would be permitted to stop providing:
-further pension accrual in the scheme;
-an actuarial uplift of pension not taken, but not provide future accruals at a lower rate than previously enjoyed;
-death in service benefits under the scheme; and
-ill health benefits under the scheme, without the need to objectively justify age discrimination.
The exemption could be relied upon once the member had entered the flexible retirement arrangement and it would operate whether or not the member chose to take all or part of his pension.
The exemption would not apply in respect of members already working under flexible retirement arrangements and it would not interfere with the rights of a member to all benefits built up in the scheme until the date. In addition the exemption would be permissive and not mandatory, with the flexibility in place not to invoke an exemption. The exemption will only apply at the state pension age, or NPA, if higher.
Option 2.
If legislation is not introduced to provide the exemption under Option 1, the second proposal is to amend the law by enabling trustees or managers of an occupational pension scheme to treat the survivor of a member who dies during a period of flexible retirement as survivor of a pensioner member. The effect of the exemption would be that for those working under a flexible retirement arrangement, death benefits from the scheme that are payable in respect of active members could be refused, without the need to objectively justify age discrimination on a scheme-by scheme basis.
Conclusion – The Way Forward
The Government’s response to the current consultation is not scheduled to be released until June 2009. Until this time scheme employers and trustees considering the introduction of a flexible retirement option may wish to defer making any decision. Which ever regulations are chosen the exemptions outlined will only apply to flexible retirement arrangements after any new regulations come into force.
For more information please contact any of our Pensions team or;