On 13 January 2011, the Government confirmed that the national default retirement age (DRA) will be abolished as planned on a phased basis beginning April 2011 and ending in October 2011. Time is going to be tight to implement changes to your HR practice if you currently rely on the national DRA.

Origins of the national default retirement age

The national DRA of age 65 was originally introduced under the Employment Equality (Age) Regulations 2006. Those Regulations were introduced as a result of the EU Employment Framework Directive that prohibits an employer discriminating against an employee on grounds of age. That is, unless the discriminatory practice can be objectively justified.

To be objectively justified, the discriminatory practice must be a proportionate means of achieving a legitimate aim. Ultimately, should an employee dispute the employer’s practice, it is the Court or the Tribunal (rather than the employer) that decides whether a particular practice is objectively justifiable.

Exception to the rule

The national DRA is an exception to the general principle of equal treatment. The DRA makes it lawful for an employer to discriminate against an employee on grounds of age when forcing the employee to retire on or after age 65. In effect, by introducing the DRA, the Government confirmed that compulsory retirement from age 65 is justified in the UK. This has meant that since 2006, individual employers have not needed to objectively justify a compulsory retirement age of 65+ if they follow the proper statutory procedure.

Notifying employees under current law

The proper statutory notification procedure under the Equality legislation holds the key to the actual date when the abolition of the national DRA will apply.

In summary, the current procedure requires employees to be notified in writing at least six months before the intended date of compulsory retirement (which needs to be age 65 or over). So, if the employer wants to notify the employee of a retirement date of 1 June 2011, that employer needs to have issued a notification to the employee on or before 1 December 2010. The employee also has a right to request working longer, which the employer then has a duty to consider.

Joint consultation between the DWP and the DBIS

In July last year the Department for Business Innovation and Skills and the DWP issued a joint consultation document. The purpose was to gain views on the Government’s proposal to abolish the national default retirement age of 65 completely on 1 October 2011. The consultation period ended on 21 October 2010.

The Government’s key proposals were as follows:

  • To abolish the national DRA from 1 October 2011  
  • To stop employers issuing new notices after 6 April 2011 using the current retirement procedure  
  • To permit employers to compulsorily retire employees usingthe existing procedures between 6 April and 1 October 2011. However, this would be allowed only if (1) the employee has received a notice of intended retirement before 6 April 2011 and (2) their retirement date is before 1 October 2011.

Time is running out to use the national DRA

Although the consultation document refers to 6 April 2011 as the date when the ability to notify employees will be withdrawn, this date is a bit misleading. In practice, with the national DRA being abolished on 1 October 2011, employers who want to avoid having to give “shortnotice” will need to notify employees under the current notification procedures by 31 March 2011 (ie six months prior to 1 October) to benefit from the national DRA. Short notice risks having to pay out up to eight weeks compensation to the employee for breach of the six month notice requirement. It will not be available in any case from 6 April.

Once the national DRA has been abolished, employers will have to allow employees to work until they resign or are dismissed, unless they decide to put in place their own compulsory retirement age.

Bespoke compulsory retirement age?

Decisions handed down by the European Court of Justice and Court of Appeal suggest that employers will still be able to adopt a compulsory retirement age for their business after the DRA has been abolished. That is, provided they can objectively justify it, eg because they want to avoid having to dismiss older employees through performance management exercises, which are bad for morale. Employers should, therefore, carefully consider their reasons when setting a retirement age and maintain a good supporting papertrail.

Effect on pension scheme benefits

Historically, the normal pension age (NPA) under a pension scheme coincided with the date on which employees were retired under their contract of employment. These days, many schemes have a variety of NPAs depending on the members’ benefit category. As contracts of employment are updated to reflect current practice, the NPAs under scheme rules have become somewhat of an anachronism. To make matters even more complicated, since the tax rules changed on 6 April 2006, many employers permit employees to take flexible retirement, leading to a disconnect between the employment contract and the NPA.

If your scheme rules do not already permit flexible retirement, it is worthwhile considering whether to introduce a company policy to permit it. Allowing employees to take their pension whilst still working reduces both the company’s pension risk and permits key employees to continue working (perhaps on reduced hours), retaining their expertise for longer than might otherwise be the case.

For pension scheme trustees, the greatest challenge to the removal of a national DRA is managing the risk associated with the provision of death in service lump sums. The majority of trust-based schemes insure this benefit through a group policy. However, some insurers will only insure up to age 70, with the scheme having to bear the risk after that date. Where insurers are prepared to insure beyond this age, the cost of so doing is prohibitively expensive, which is why schemes are often forced to self-insure. It means that employers and trustees will need to have some meaningful discussions on the employer’s retirement policies and the costs associated with death in service provision from the pension scheme.

Technical information

The default retirement age exemption was originally included in Regulation 30(2) of the Employment (Equality) Age Regulations 2006 (S.I. 1031) and is now included in paragraph 8 (1) of Schedule 9 to the Equality Act 2010. The requirements to notify employees are still set out Schedule 6 of the Age Regulations, with this Schedule still in force for the time being.

To access the July 2010 consultation document go to: http://www.bis.gov.uk/assets/biscore/employment-matters/docs/ p/10-1047-default-retirement-age-consultation.pdf

Action required

Employers:

  • Consider what your HR practices will be on the removal of the national DRA  
  • Check the position under your scheme(s) for death in service insurance cover and any upper age limit and discuss the position with the trustees  

Trustees:

Review scheme insurance arrangements on death in service and discuss with the employers how retirements from active service will be managed in future