The Department for Work and Pensions (the DWP) has issued a consultation document which seeks views on issues raised since the implementation of Schedule 2 to the Employment Equality (Age) Regulations 2006 (the Age Regulations) on and from 1 December 2006. Part 2 of Schedule 2 sets out the exemptions from the Age Regulations which apply to Occupational Pension Schemes. The consultation period runs until 7 December 2007.
View the consultation paper (pdf 104kb).
Since A Day (6 April 2006) and the implementation of the legal provisions in the Finance Act 2004, which introduced flexible retirement, registered schemes have been able to permit members to take all or part of their pension and lump sum benefits whilst continuing to work. The pensions provisions of the Age Regulations came into force on 1 December 2006, following which the DWP issued its related guidance with the intention of assisting employers in the application of the Age Regulations in practice. However, the pensions industry has commented that the existing DWP guidance is unclear as to which practices may be construed as age discriminatory and, although updated guidance has been anticipated since the beginning of 2007, the DWP has now decided to run a consultation before publishing anything further.
View the guidance (pdf 205kb).
The DWP is seeking views on two primary areas of concern which have been brought to its attention:
- the interaction between the Age Regulations and the increasing desire to allow older workers some flexibility in how they work as they approach retirement; and
- the provision of death benefits beyond a scheme's Normal Pension Age (NPA).
The interaction between the Age Regulations and flexible retirement
The Government is particularly keen to obtain the view of the pensions industry and employers on flexible retirement, as it believes that allowing older workers to retire flexibly will encourage them to work longer, resulting in the retention of skills in the workforce and the avoidance of the “cliff-edge” experienced by some workers when they stop work completely and subsequently rely solely on their pension income. The DWP recognises that although, since A Day, it has been possible for schemes to offer flexible retirement provisions so that members can continue to work and draw some or all of their scheme benefits, many schemes have continued to operate with rules that either do not permit further accrual of pension rights after NPA or require that an individual stops working before his pension can be taken. In addition, employers may be reluctant to implement change without case law and could be cautious in proposing modifications to a scheme which could be discriminatory. Without further guidance, the pensions industry and employers may be unclear what might constitute discriminatory practice in relation to flexible retirement provision and although there are several ways in which flexible retirement can be offered, employers have expressed concern that the way schemes decide to implement flexible retirement rules could give rise to direct or indirect age discrimination. The DWP notes that issues relating to flexible retirement arise mainly in final salary (defined benefit) schemes and requests it is notified of any issues relating to money purchase (defined contribution) schemes, together with suggested solutions.
The DWP is keen to avoid discouraging any provision which employers currently offer, restricting future plans for pension provision or causing a leveling down of benefits. Neither would it wish to see schemes freezing their existing benefit provision as a result of the introduction of revised regulations which are interpreted as over restrictive or complex.
With this in mind, the consultation requests schemes to provide examples of existing flexible retirement practices and how they are handled within the company and to be notified of practices which employers find are currently working well. Employers are also asked to point out any other practices relating to flexible retirement and pensions which may be causing confusion as to whether or not they may be discriminatory (and how).
The DWP seeks views on both the forms age discrimination can take in relation to flexible retirement and asks employers to highlight the practices they believe should be exempt or which they believe can be objectively justified.
The relationship between Normal Pension Age (NPA), the Default Retirement Age (DRA) and Normal Retirement Age (NRA)
The DWP recognises that there is some uncertainty as to how the legislation works with employees who are entitled to take their actuarially unreduced pension at an age (NPA) that is earlier than the age at which they can be lawfully dismissed on the basis of retirement (the DRA), or their NRA if this is higher than the DRA.
The Age Regulations allow employers to retire employees who are age 65 or over (the DRA is 65) without this being regarded as discriminatory. However, where an employee has an NRA which is higher than the DRA, dismissal before NRA may amount to unfair dismissal.
It is possible for an employee to have an NRA lower than 65. However, this is not covered by the Age Regulations and dismissal of employees below age 65 may be directly discriminatory and require objective justification.
It is also possible that the NPA of a scheme could be lower than both NRA and DRA. The DWP’s research shows that the average NPA is below 65, with the vast majority of schemes allowing members to retire after NPA and, where retirement is allowed after NPA, the majority allow accrual at the same rate as before. The majority of schemes allow retirement before NPA on a voluntary (and presumably reduced, although this is unclear from the consultation paper) basis.
The DWP seeks views on the retention of NPA below 65 and the interaction of DRA/NRA and NPA when flexible retirement is provided.
Offering benefits after NPA
Providing flexible retirement and pension provision is not mandatory and therefore employers currently have a choice whether or not to offer benefits after NPA. The DWP recognises that administration could become complex and, as a result, this could lead to increased costs but this in itself would not constitute objective justification for employers disallowing further accrual. It also appreciates that employers may not provide post-NPA benefits due to the practicalities of amending their scheme rules.
Views are sought on not providing benefits after NPA and on allowing the partial drawing of benefits.
The DWP is aware that the preservation legislation does not take flexible retirement into account but it has no current plans to change primary legislation. The DWP suggests that it may be useful to expand the list in regulations of alternatives to short service benefit. The additional provisions would make it clear that when a member draws some of his pension benefits early, those benefits already taken would not be “double-counted” when the remaining benefits are valued later for short service benefit.
Death benefits beyond a certain age
The DWP reminds employers that, in its view, where life cover ceases for those who continue to work, this must be objectively justified. Levels of benefit may be adapted to reflect a different risk profile but this still needs to be objectively justified. The DWP also asks whether there are any occasions where it may be justifiable not to provide death benefits after NPA.
The DWP’s approach in conducting the consultation is to promote extended working lives in order to provide employees with a decent income in their retirement phase. Although the consultation is primarily aimed at the employers, trustees and administrators of occupational pension schemes and their advisers, the DWP will also welcome comments from other interested parties and the general public.