It has long been acknowledged that the impact of the
Employment Equality (Age) Regulations 2006 (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 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
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.
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 caregivers, by introducing weekly credits to
reward caring in the same way as working.
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.