Flexible retirement/age discrimination update

Age Discrimination – a quick reminder

22 January 2009

Age Discrimination – a quick reminder
The law on age discrimination in occupational pension schemes changed with effect on and from 1 December 2006, such that it became unlawful for an occupational pension scheme to discriminate against its members on age-related grounds. The legislation was drafted to include an implied non-discrimination rule into every pension scheme. Given the inherent age related aspects of pension schemes and pension provision, however, the pension scheme age discrimination legislation set out a number of exemptions to the prohibition on age discrimination. These exemptions allowed for the continuation of certain rules and practices within occupational pension schemes, which would otherwise have fallen foul of the age discrimination legislation.

What is the difficulty with flexible retirement and age discrimination?
Following the introduction of the age discrimination regulations, there was widespread confusion within the pensions industry regarding application of the regulations in relation to flexible retirement and pensions. As you will be aware, registered pension schemes have been able to offer flexible retirement since 6 April 2006, giving members the option of taking all or part of the pension/lump sum benefits, but also to continue to work. Prior to 6 April 2006, it was necessary for members to leave pensionable service in order to draw their benefits under a pension scheme. The perceived tension between the new flexible retirement provisions and age discrimination legislation is that there is a lack of clarity as to whether flexible retirement provisions could be considered age discriminatory and there was particular confusion as to how to deal with the provision of death benefits beyond a scheme's normal pension age.

On account of this lack of clarity, many schemes have been reluctant to introduce flexible retirement options and this is something that the Government is seeking to change. The DWP has made it clear, in the December 2008 consultation document, that it is seeking to "mitigate any disincentive effect" of offering flexible retirement options by consulting on options for introducing a further age discrimination exemption in respect of flexible retirement arrangements. The two options (one described as "wide" and the other far more limited exemption) put forward by the DWP in the December 2008 consultation, are set out in alternative versions of draft Regulations and are explained below.

Definition of flexible retirement within the meaning of the draft regulations
Within both versions of the Regulations which have been put forward, a flexible retirement arrangement is defined as an arrangement between a member and his employer under which the member reduces his working hours or the grade in which he is employed after becoming eligible to receive all or part of the age related benefits payable to him under the scheme.

As currently drafted, this definition does not include a member who takes some or all of his pension benefits but continues to work the same hours at the same grade as prior to taking his pension benefits. The DWP is consulting on this exclusion and it seems likely that at least some respondents to this consultation process will criticise this limited definition of flexible retirement. Crucially, neither of the exemption options set out in the consultation apply to persons who have entered into flexible retirement arrangements prior to the coming into force of this exemption.

Option 1 – "wider" exemption linked to flexible retirement arrangements
This option provides for a new exemption to the age discrimination regulations that would apply to any flexible arrangement that takes effect at men's state pension age (currently 65) or a scheme's normal pension age, if higher. This exemption would render any rule, practice, action or decision of the employer or trustees that discontinues pensionable service for a person working under such a flexible retirement arrangement lawful. This means that, without having to objectively justify age discrimination, schemes allowing flexible retirement arrangements would be permitted to stop providing: further pension accrual in the scheme; an actuarial uplift of pension not taken; death in service benefits under the scheme; and ill-health benefits under the scheme. Members who die during a flexible retirement arrangement would be treated as pensioner members for the purposes of calculation of survivors' benefits.

As drafted, the exemption could be used to justify stopping future accrual of benefits, but not to instead provide future accruals at a lower rate than previously given – the DWP is also seeking views on whether the exemption should be more flexible to permit accruals at a lower rate.

Option 2 – death in service benefit exemption
This option, which the DWP has proposed as an alternative to option 1, provides only for a very narrow exemption allowing schemes to cease to provide death-in-service benefits for members participating in a flexible retirement arrangement (which again takes effect from age 65). A member of a flexible retirement arrangement would be treated as a pensioner member for the purposes of calculation of survivors' benefits. This is in response to concerns that the survivor of a member in a flexible retirement arrangement may be entitled to benefits that would normally accrue in respect of both an active member and those that would accrue in respect of a pensioner member. The DWP ask, in the consultation, whether the provision of ill-health benefits during a flexible retirement arrangement should be included as part of this narrower exemption.

The DWP consultation will run until 10 March 2009 and it is not known at this stage when the final set of Regulations will be issued. We will keep you informed of any developments in this area but please let us know if you wish any advice on this issue in the meantime.