Pensions World

Vanessa Wells, Eversheds, considers the consequences for schemes of the imminent demise of the default retirement age

1 October 2011 is fast approaching and, with it, the complete abolition of the default retirement age (DRA).

What is changing?

Before 6 April 2011, employers could terminate employment for reason of retirement at age 65. The only conditions were for employees to be consulted beforehand and for any request to stay to be given genuine consideration (see Compass Group plc v Ayodele [2011] UKEAT 0484_10_1407).

Transitional provisions have been in place since 6 April 2011 to cater for notices of intended retirements that were issued on or before 5 April 2011, provided that the employee reaches age 65 by 30 September 2011.

However, from 1 October 2011, it will be discriminatory to dismiss an employee by reason of age.

Older employees

For older employees, the implications are positive – they will have the right to continue in employment. Furthermore, the change will provide employees with more flexibility to transition into retirement gradually and, with the proposed increases to state pension age looming on the horizon, it will also allow employees to postpone their retirement until any state benefits become payable.

Younger workers

On the other hand, younger employees will be competing for jobs against a potentially larger and, inevitably, more experienced population. However, whether the change will stifle career progression and opportunities for promotion, as some commentators have predicted, remains to be seen.

Employers

For employers, there are potentially significant cost implications. Employers will no longer be able to dismiss employees after age 65 except for poor performance, redundancy, conduct or capability reasons. Employers will generally also need to continue to provide members who remain in employment after age 65 with the same benefits to which they are currently entitled. Retirement age policies will therefore need to be rewritten.

There is a general exception that allows employers to retain a compulsory retirement age or provide different benefits to older employees, if it is a proportionate means of achieving a legitimate aim. There has been limited case law to date as to what constitutes a proportionate means of achieving a legitimate aim. Most commentators agree that employers will be required to show there is a real business need. What is not clear is whether or not cost alone would be sufficient justification.

Ultimately, decisions will depend on the facts of each individual case. The only current certainty is that, following the abolition of the DRA, there is likely to be greater judicial scrutiny, particularly in relation to compulsory retirement ages. For many employers, the lack of clarity will be too great a risk.

Insurance premiums

One major concern raised during the consultation process was the significant increase in the cost of insurance premiums, such as life cover, once an employee reaches age 65. In response, an exception was introduced into the legislation that allows employers to withdraw arrangements for, or access to, the provision of insurance or related financial services. The exception is drafted in such a way that it might not apply to insured benefits provided under pension schemes (opinions differ on this point). It is unclear whether the legislation will be amended to expressly cover pension schemes.

Action points for trustees

Trustees should review their scheme rules to identify any inconsistencies between them and the revised retirement age policies put in place by sponsoring employers. Trustees should also review the terms of any insured benefits in place to check whether cover will continue after age 65. If not, this should be flagged to the employer.