In the previous client memorandum on 6 October 2006, we highlighted the impact of the Employment Equality (Age) Regulations 2006 (Age Regulations) for UK companies. The impact of the Age Regulations on pension schemes was always going to be potentially controversial given the nature of pension schemes in the UK. The pension changes were in fact postponed due to this controversy and have only now been implemented following further consultation with scheme trustees, trade unions and businesses.

The Background

The Age Regulations was implemented to ensure the UK Government properly complies with the implementation of the European Equality Directive.

The European Employment Directive permits member states to exempt certain aspects of occupational pension schemes from age discrimination legislation. This includes fixing different ages for employees or groups of employees to be entitled to occupational pension benefits and the use of age criteria in actuarial calculations. The Directive also provides for a ‘legitimate aim’ justification where discriminatory provisions can be retained in occupational schemes if they can be objectively justified.

The Current Position

The UK government has now issued The Employment Equality (Age) Amendment (No.2) Regulations 2006 (Amendment Regulations) to comply with the Directive. Much to the dismay of advisers there is no transition period and the Amendment Regulations are immediately effective. Employers and scheme trustees are now faced with the practical challenges of implementation.

The Amendment Regulations provide a number of exemptions which will permit employers to continue with many age-based rules and practices (albeit technically discriminatory) in relation to pension schemes. However there are some important changes.

The Key Changes

The main changes are as follows:

  • It will be unlawful for trustees, or managers of an occupational scheme to discriminate against a member or prospective member of a pension scheme on the grounds of their age. Following the consultation period this requirement also extends to employers.
  • The Regulations provide for an ‘early retirement pivot age’ in respect of pension schemes which will be an age specified in the scheme rules as the earliest age at which pension entitlement arises without requiring consent from an employer or trustee and without any actuarial reduction being made to the member's benefits.
  • A length of service exemption is given with regard to any rule or practice regarding admission to a scheme, accrual of benefits or eligibility for any benefit from the pension scheme and consequently it will not be unlawful if there is a length of service requirement. Further exemptions have also been made for age-related contributions to money purchase arrangements.

Closing sections of pension schemes to employees if they have not already joined is not unlawful under the Amendment Regulations.

The Amendment Regulations will not affect personal pensions and state pensions but if employers make payments into personal pension schemes, then this will be caught by the Regulations.

Next Steps

Employers should review all their age-based rules and consider whether or not certain rules will have to be objectively justified to fall within the exemptions.

If there is a breach of the legislation which is rendered unlawful, the ‘punishment’ is that the benefits provided to some employees must then be provided to all members. Legal advice should therefore be sought. ‘Doing nothing’ is extremely risky therefore employers and trustees should take action now.

A note on the Pensions Bill

Whilst the Regulations have not affected the state pension scheme, the UK government has been reviewing the state pension provision separately and the changes are now enshrined in the new Pensions Bill.

The Bill was published on 29 November 2006 and one key change will be to link the basic state pension to earnings. This in effect will make the state pension more generous. The UK government also intends to raise the state pension age gradually to 68 years by 2046. The UK government is also seeking to make the system fairer for women, by reducing the number of years required for a full basic state pension and fairer for carers, by introducing weekly credits to reward caring in the same way as working.

Conclusion

Pension provision in the UK continues to be the subject of much debate and this will continue to be the case as companies and pension scheme trustees try to implement and comply with the new legislation. With around 10,000 defined benefit schemes in the UK covering 8.7 million employees and defined contribution schemes covering around 1 million employees this new legislation and proposed changes could have a significant impact.