In this month’s Pensions E-Bulletin, we consider a recent case from the ECJ concerning the retention of a compulsory retirement age, the impact of the Agency Workers Regulations 2010 on pension entitlement and the forthcoming judicial review by various public sector organisations of the Government’s decision to increase public sector pensions in line with CPI as opposed to RPI.

Justifying the retention of a compulsory retirement age

As previously discussed in our November 2010 and February and June 2011 E-Bulletins, the current default retirement age (DRA) of 65 will be fully abolished from 1 October 2011. It will still be permissible for a normal retirement date to be retained within a pension scheme. Most schemes now allow flexible pension provision for those employees staying in service after the pension scheme’s normal retirement date. There are employment considerations for the employers with the removal of the DRA and these must be discussed with trustees in relation to their schemes.

Employers will be able to retain a compulsory retirement age, but only where this can be objectively justified. Objective justification requires an employer to show that:

  • there is a legitimate aim, i.e. a real business need that is being met;
  • having a particular retirement age meets that aim; and
  • using that retirement age is a proportionate way of achieving that aim.

The recent ECJ case of Fuchs provides some guidance as to when the ECJ considers this test will be met with the result that the application of a compulsory retirement age is considered lawful.

The case concerned a reference to the ECJ by a German national court on whether a German law requiring civil servants to retire at age 65 could be objectively justified. In the case, two German state prosecutors challenged the decision of the Government to force them to retire on reaching age 65 and to refuse them permission to defer their retirement to 68 (as they were entitled to request).

The ECJ held the Government’s aim of achieving a balanced age structure within the workforce with a view to enabling personnel planning, avoiding disputes regarding older employees’ fitness to continue working and encouraging younger people to join and stay with an employer was legitimate and that adopting a retirement age of 65 was “not an unreasonable way” of achieving that aim. In coming to that decision, the court placed emphasis on the generous pension entitlement enjoyed by the prosecutors (likely to amount to a pension of around 72% of salary).

Whilst this decision suggests that it may be easier than expected to justify the imposition of a compulsory retirement age, it must be treated with caution, being made with reference to the specific provisions of German law. In addition member state governments enjoy a significant “margin of appreciation” when implementing EU discrimination laws, and this discretion is likely to have influenced the decision of the ECJ. Private employers in the UK who, like those across the EU, will not enjoy any such “margin” are likely to face a far stricter test of objective justification than that which was applied in this case.

Until such time as the UK courts are able to provide some clarification as to their approach to the objective justification of compulsory retirement ages, the scope of this exception to the general prohibition in the UK will remain somewhat unclear.

The impact of the Agency Workers Regulations 2010

The Agency Workers Regulations 2010 are due to come into force on 1 October 2011, with the aim of ensuring that the basic working and employment conditions of agency workers (for example, those relating to pay, working time and annual leave) are no less favourable than if they had been recruited directly. The Regulations give new rights to agency workers after 12 weeks’ work and prohibit detrimental treatment or dismissal of agency workers on the ground of their status.

The Regulations exclude some benefits from the equal treatment requirements, including both occupational pensions and health and life assurance benefits and consequently will not require employers to offer agency workers pensions and pension-related benefits on the same basis as their employees. That said, employers should note that on the implementation of auto-enrolment, agency workers may be entitled to a pension (agency workers being “eligible employees” for the purposes of the auto-enrolment provisions).

Judicial review of Government’s CPI switch decision approaching

In April of this year, a collection of pensioners’ organisations and trade unions (including the Civil Service Pensioners’ Alliance, the GMB, the FDA and the Police Federation) applied for a judicial review of the Government’s decision to increase public sector pensions in line with CPI as opposed to RPI (the impact of this decision on private sector pensions was discussed in our February and July 2011 E-Bulletins).

The basis of the challenge to the Government’s decision is two-fold.

  1. The decision to switch to CPI is beyond the Secretary of State’s powers granted in terms of the Social Security Administration Act 1992. They argue that while that Act requires the adopted measure of up-rating to reflect the general level of prices, CPI focuses on consumer behaviour and the reaction to rising prices (for example, changing to a cheaper equivalent product).
  2. Public sector workers have paid for added years and other additional benefits on the understanding that these would be increased using RPI. 

The High Court (though expressing some scepticism about the merits of the challenge) has granted the claimants’ application for judicial review and the hearing is expected to commence on 25 October 2011. A successful challenge resulting in the reversal of the Government’s decision to switch to CPI would impact upon all public sector pensions, a number of state benefits and those private sector pensions which, as a result of the provisions of their rules, were affected by the Government’s decision to switch to CPI.