The Government’s announcement of the abolition of the default retirement age (“DRA”) of 65 from 1 October 2011 may have some impact on employee share plans.
Background to the change
The DRA currently allows employers to require employees to retire at age 65 without fear of age discrimination claims, provided certain procedures are followed. Following the abolition of the DRA, employers must choose either to:
- No longer specify an age at which employees must retire, so that each employee’s situation is looked at separately; or
- Continue to have an age at which employees must retire. Whatever the age, however, employers will have to objectively justify this in all circumstances, whereas at present employers are only required to objectively justify compulsory retirement below age 65.
It is thought that most employers will abandon the concept of a compulsory retirement age altogether. However, this will be a different debate in each company and decisions taken will have far reaching implications. A transitional period begins on 6 April 2011.
For a copy of our earlier Law- Now on the proposed changes to the DRA in the wider employment context, click here.
Do share plan rules need to be amended?
Logically, companies' approach to to their retirement provisions in their share plans should only be determined after they have undertaken a review of their retirement arrangements generally so that there is overall consistency
Many employee share plans treat participants who retire as “good leavers” so that they are treated more favourably than certain other leavers, for example someone who leaves to take up alternative employment. In the light of their decision on whether to have a compulsory retirement age (and if so, at what age), companies then need to review their employee share plans and consider whether an amendment has become necessary or appropriate.
For many companies, retirement provision changes will evoke a sense of déjà vu as companies also had to go through a similar exercise in 2006 when age discrimination provisions were introduced. This time round, however, the issues are generally easier (helped as well by a generally reduced level of fear about age discrimination concerns in the employee share plans context).
Although share plans should be reviewed on a case-by-case basis, changes should normally only be relevant in two cases:
1. Outdated terms
The first category of plans where amendments may be needed are those where express terms used in the plans no longer make sense – for example, they cross-refer to a compulsory retirement age and/or compulsory retirement when a company no longer has this provision or has changed the age. An additional problem might arise where “normal retirement age” is used as this term is likely to become meaningless over time as retirement is taken more flexibly so that there is no longer any detectable norm.
2. Retirement provisions more indirectly related to compulsory retirement
This second category of plans would include terms indirectly related to compulsory retirement eg retirement at 65 or setting a retirement age in an all-employee plan at the compulsory retirement age, without having expressly linked it to a formal compulsory retirement age. Here, where the compulsory retirement age has disappeared and that age was the reason for including age 65 (or other age) in the plan, then there seems a case for reviewing whether that provision should still apply or be amended to keep up with the company’s practice.
Where change is needed – what should the change be?
Experience from 2006 shows that there is no one right answer and the debate in 2011 is still based on the same principles. In many cases, virtually any answer may be objectively justified. Whether to have a share plan retirement provision at all and minimum age at which it operates are all questions which can fall either way depending on how much weight a company attaches to particular factors.
Many companies have resorted to the simple option of either including all retirements or not covering retirement at all and just leaving decisions in retirement cases to be taken on a case by case basis, providing they have sufficient discretion to do so. Both are defendable approaches to take, but there are also others.
In the continuing absence of specific judicial guidance for share plans, our advice is that it is simply important that companies approach the question by working out whether they can objectively justify their share plan provisions and, if they do have a minimum age in their plans, can also justify retirement below the relevant age not being an automatic good leaver reason.
Save-as-you-earn (SAYE) plans
SAYE plans have a particularly difficult rule. In addition to options being exercisable for six months at a plan specified age (set by a company at between 60 and 75), SAYE options can also be exercised if someone retires at the age at which he is “bound to retire”. There is some doubt as to whether this second provision will have any meaning going forward if a company has no compulsory retirement age as there is no “compulsion” to retire: this is still being discussed with HM Revenue & Customs, together with why SAYE and SIP plans need to have different provisions on retirement at all. Under Share Incentive Plans (SIPs) all retirements – compulsory or voluntary – are treated as good leaver reasons so long as they occur above a plan age which cannot be lower than 50.
Approval for amendments to share plan rules
Where amendments are required, companies will need to consider whether shareholder approval is required although experience in 2006 shows that this is extremely unlikely. Amendments to the rules of Company Share Option Plan (CSOP), SIP and SAYE plans will also require prior approval from HM Revenue & Customs.
Companies should review their employee share plan rules in light of the abolition of the DRA. Although most plans will not need to be amended immediately, companies should consider whether an amendment is appropriate, in particular where:
- the company ceases to have a compulsory retirement age;
- the company changes its compulsory retirement age; or
- the rules expressly refer to the DRA or other fixed age.