The Department for Business Innovation and Skills and the Department for Work and Pensions have issued a joint consultation on the Government's proposal to phase out the default retirement age. This goes hand in hand with the Government's plans to raise the State Pension Age to 66 sooner than scheduled by the previous administration.

Wragge & Co's pensions experts look at the proposal in more detail.

Why was the default retirement age (DRA) introduced in the first place?

EU law contains a broad general principle of equal treatment, which prohibits an employer discriminating against an employee on the grounds of age (among other grounds). The UK was required to introduce legislation designed to counteract unlawful age discrimination in line with EU law. However, EU law (and enacting UK law) does permit certain measures which would otherwise be discriminatory if those measures are objectively justified because they are a proportionate means of achieving a legitimate aim.

The DRA of 65 was introduced back in 2006 as part of UK legislation intended to meet EU requirements and to prohibit age-related discrimination in employment. From the outset, this has been controversial. On one hand, the Government has advocated that employees should not be discriminated on age grounds (in line with EU law). On the other hand, the DRA allows employers to dismiss employees once they have reached a certain age (65 or above).

The DRA (and accompanying procedures under the age discrimination legislation) mean that employers are not required to adopt a retirement age for staff. However, those that do so must follow certain prescribed notification requirements in the lead-up to an employee's retirement if they are to avoid a successful age discrimination claim.

This question has come into prominence through R v (Age UK) v Secretary of State for Business, Innovation and Skills (the Heyday case) brought against the UK Government by an off-shoot of Age Concern. Ultimately, the Government managed to satisfy the courts that the DRA is objectively justifiable, but it has always indicated that it would review the DRA in due course. The new Government has now decided the time has come to remove the DRA.

What does the consultation propose?

The Government wants to abolish the DRA by 1 October 2011. Employers will no longer be able to use it to maintain a compulsory retirement policy for their workforce at age 65 or above.

Under the proposals, the removal of the DRA will be phased-in by way of a six-month transitional period. Between 6 April 2011 and 1 October 2011, employers will still be able to use the DRA regime to compulsorily retire those people who were notified before 6 April 2011 that compulsory retirement would apply to them before 1 October 2011. This might lead to a rush of "pre-April dismissals", but at present the Government has chosen certainty on timing over practical downsides.

Once the DRA is abolished, the Government proposes that employers will still be able to impose their own compulsory retirement age if they can "objectively justify" doing so and follow a fair process. This is a significant shift from the current position, which allows employers to fairly dismiss employees on the grounds of retirement once they have reached the DRA if various prescribed steps have been followed. We anticipate that the removal of the DRA will lead to a more uncertain and difficult position for employers.

Comments as part of the consultation are invited until 21 October 2010 and the Government anticipates issuing a speedy response by November 2010. The time-scale is tight and so businesses do not have long to adapt systems to the final form changes.

All employers, regardless of size or type of business, are likely to be impacted by the changes and now is the opportunity to have your say. We are preparing a submission, both as an employer and to reflect our clients' concerns.

Getting rid of the red tape?

One consequence of abolishing the DRA will be the abolition of the statutory retirement procedure, which is an administrative procedure employers must currently follow before retiring their employees. But will this mean less red tape?

Under the proposals, employers would still need to follow a fair process when dismissing employees on retirement grounds, or otherwise, and rely on one of the existing fair reasons for dismissal in order to minimise the risk of unfair dismissal claims. Set out in the Employment Rights Act 1996, these fair reasons are capability, conduct, redundancy, illegality or some other substantial reason.

In addition, the consultation document still envisages employers being able to set their own retirement age for employees, subject to the retirement age(s) being objectively justified. This could potentially lead to headaches for employers in trying to establish what would be an objectively justifiable retirement age in the circumstances.

For example, would age 65 as a retirement age be objectively justifiable for all staff, or should it be age 65 for part of the workforce, and age 68 for others? This process is likely to involve its own red tape, as employers try to understand the circumstances in which retirement ages can or cannot be objectively justified.

Guidance on objective justification has been published by the Equality and Human Rights Commission. Ultimately though, we expect that it will be cases such as the Court of Appeal's recent decision in Seldon v Clarkson Wright & Jakes that are likely to assist employers in deciding what factors are sufficient to objectively justify a compulsory retirement age.

The Government wants industry views on all aspects of the proposals, including: whether the removal of the DRA and reliance instead on the traditional "fair reasons" for dismissal set out in the Employment Rights Act 1996 is the best way forward; and, how employers envisage discussions with staff who may be thinking about retirement would work in the absence of the current procedures required leading up to retirement.

Are there any other knock-on effects?

The Government recognises that abolishing the DRA could lead to unintended consequences. It has already identified that problems might arise when it comes to insured benefits for older employees and in relation to the rules of certain employee share schemes.

In relation to insured benefits, many employers impose age limits or age-related conditions on entitlement to insured benefit schemes, usually passing on the provider's higher premiums for older employees to the employees themselves. This is mainly due to the higher costs that typically apply in respect of older workers or because of the requirements for medical underwriting beyond a particular age.

If the DRA is removed before legislation is introduced requiring equality in the provision of goods and services (anticipated as part of the Equality Act 2010) will employers have to pick up the cost of providing equal treatment to all workers regardless of age? Or, will there be some exemption based on cost?

At present, benefit providers are not covered by the UK's age discrimination provisions, and this is only expected to change in 2012. This means employers currently take all of the risk if benefits are not provided post-65.

Many share schemes have provisions which allow pay outs for "good leavers", often being those who are made redundant, or retire, and no payout for "bad leavers" such as those who leave voluntarily. If employees agree to continue to work for longer, but this results in them leaving voluntarily, will they lose out on their share scheme benefits?

Another uncertain area has been pension provision beyond normal retirement age, which is not covered by any specific exemption under the current age discrimination legislation. Some employers are allowing employees aged over 65 ongoing pension accrual in final salary pension schemes, but this is very much an individual business decision.

In our experience, most employers allow flexible retirement. For example, employees can take their company pension while remaining employed in the business and being offered ongoing membership of a money purchase arrangement, for example. The removal of the DRA provides a significant challenge on this point: will employers have to allow final salary benefits to age 75, or later?

The consultation is seeking views on these, and other, unintended consequences of the removal of the DRA.

Comment

Implementing the Government's plans as currently proposed will remove the inconsistency inherent in legislation which is designed to prevent age discrimination and encourage people to work for longer, but which allows employees to be dismissed for no other reason than that they have reached their 65th birthday.

However, the removal of the DRA is potentially radical and far-reaching. It does not simply place us back in the position we were before October 2006 when the age discrimination regulations were introduced because, before they were introduced, employees were not able to bring unfair dismissal claims once they had reached age 65 (unless the dismissal would have been automatically unfair).

Once the DRA has been removed, unfair dismissal claims could potentially be brought at any age. Employers wishing to impose compulsory retirements in the future will face a greater exposure to the risk of tribunal claims if they fail to manage their workforce effectively. They will need to be clear on their grounds for objectively justifying any normal retirement age. They will also still need to follow a fair dismissal procedure when dismissing employees in order to avoid "double-pronged" claims of unfair dismissal and age discrimination.

Employers running final salary schemes who choose to abandon a compulsory retirement age will need to speak with their advisers about the implications for their scheme and other benefit provision. Third party benefit provision might become more usual.

This will be a particularly significant shift for employers who have relied upon the DRA as a way of managing succession planning and avoiding difficult conversations with staff who are nearing the end of their working lives. In the current economic climate, the proposals may also increase redundancy costs for businesses.

Until now, employers have been able to rely on the retirement procedure as a way of "cleanly" exiting older employees from the workforce without having to worry about dismissing those employees as part of wider business redundancy exercises. But older employees tend to have longer service and are more likely to have built up generous redundancy entitlements through contractual and/or pension scheme benefits. This will need to be taken into account when future redundancies are planned.

The proposed changes are also likely to lead to bigger picture questions around the social consequences of removing the DRA, such as the impact on the economy as a whole and on the younger generation's job prospects.

While the Government deals with the bigger picture, the implementation will be down to employers "at the coalface". They will need to understand what (if any) exemptions are on offer, whether they are going to impose a compulsory retirement age in respect of their own staff, and if so, why.

The ramifications of an end to the DRA are hugely significant and extend well beyond issues such as red tape. The consultation exercise is an opportunity for employers and other stakeholders to raise these questions so that we might have at least some of the answers to these questions before October 2011.