The end of the default retirement age is nigh!

Introduction

Under the Age Regulations, it is lawful for an employer to dismiss an employee aged 65 or over by reason of retirement, this is known as the default retirement age (DRA).

The DRA has been under threat ever since the High Court’s decision inHeyday.1 The outgoing Labour administration pledged to review the position in 2010. However, a change in Government brought decisive action and the Coalition immediately committed to phasing it out.

A consultation on their specific proposals was published on 29 July 2010. It closes on 21 October 2010.

Key points

The DRA will be removed from legislation on 6 April 2011.
There will be a transitional period to cover retirements which are already in train.
Retirements using the DRA will cease completely on 1 October 2011.
From April 2011, employers will need to objectively justify having a compulsory retirement age for their workforce.

The proposals

While the DRA will be removed from legislation on 6 April 2011, a transitional period will run from 6 April 2011 to 1 October 2011 to allow retirements that are already in progress to be completed, provided that:

a notification of retirement is issued by the employer prior to 6 April 2011;
the date of retirement falls before 1 October 2011;
all requirements of the DRA procedure are met.

Retirements using the DRA will cease completely on 1 October 2011. For example, if someone is notified of their retirement date in February 2011 but does not reach this date until after 1 October 2011 they cannot be compulsorily retired using the DRA process.

Objective justification

Employers may discriminate on the grounds of age if they can objectively justify their action. This means that they may continue to use a compulsory retirement age after 6 April 2011 if they can demonstrate that it is a “proportionate means of achieving a legitimate aim”. This can be difficult to prove but, essentially, the legitimate aim (for example, facilitation of employment planning) must outweigh the overall aim of preventing discrimination.

Encouragingly, in the Seldon2 case, the Court of Appeal has decided that a partnership’s3 policy of compulsory retirement at age 65 was objectively justified. Although, of course, this was against a backdrop of the DRA of 65.

What does this mean for pension schemes?

Insured benefits are mentioned in the consultation as an “unintended consequence” of the removal of the DRA. The fact that insurance may not be available for older workers, or be significantly more costly to provide is recognised, and “further views” are invited on this issue. Unless the Government is prepared to grasp the nettle on this one, however, schemes can expect to have to shoulder more cost in future.

The potential impact on pension schemes has not been identified by the Government. However, schemes will surely feel the change as, for generations, they have paid benefits at “normal” retirement date.

For now it seems likely that schemes will be able to keep target pension ages for entitlement to benefits. But, they will need to decide what benefits will be provided to people who keep working beyond this age. The Government’s hope is that the removal of the DRA will lead to an increased dialogue between employers and employees and necessitate more flexible working practices, including flexible retirement.

1 R (on the application of Age UK) v Secretary of State for Business, Innovation and Skills [2009] EWHC 2336. For further details, please see our Alert: “Default retirement age of 65: Here today, gone tomorrow?” dated 30 September 2009
2 Seldon v Clarkson Wright & Jakes [2010] EWCA Civ 899
3 The current DRA does not apply to partnerships