The bell tolls for the default retirement age

Introduction

Despite calls to delay implementation of its proposals, on 13 January 2011 the Government confirmed that the DRA will be phased out between 6 April and 1 October 2011.

In this Alert:

• Key points
• Timing
• Impact on occupational pension schemes
• Insured Benefits
• Action

Key points

• The Government has published its response to the consultation on its proposals for the removal of the DRA (the “Response”), alongside employerguidance from ACAS on “Working without the DRA”.
• From April 2011, there will be no DRA and employers who wish to retain a compulsory retirement age for their workforce will need to objectively justify this.
• However, there will be a short transitional period up to 1 October 2011 to allow retirements to go ahead where people reach age 65 before that date.
• The Government intends to introduce a new exemption to the age discrimination legislation to permit employers to withdraw group risk insured benefits1 from employees aged 652 and above.

Timing

Employers wishing to make use of the existing DRA procedure (to retire people at age 65 without this being treated as unfair dismissal or age discrimination) must issue notifications to relevant employees by 30 March 2011.3

Compulsory retirements at age 65 that are already in progress may be completed provided that:

• a notification of retirement is issued by the employer (effectively) by 30 March 2011;
• the date of retirement falls before 1 October 2011; and
• all requirements of the DRA procedure4 are met.

Retirements using this procedure will cease completely on 1 October 2011. If someone receives notification of retirement, but does not reach age 65 until after 30 September 2011, they cannot be compulsorily retired using the DRA process and will be treated as having been dismissed.

Impact on occupational pension schemes

The Government’s view, set out in the Response, is that “the removal of the DRA does not affect occupational pension schemes” as the absence of a DRA does not affect the setting of an NRA for the purposes of the scheme. In one way this looks like good news, as it appears to mean the Government will retain the exemption from age discrimination legislation5 allowing occupational pension schemes to set an age at which people become entitled to benefits.

But, unfortunately, the Response avoids the problem that, even if it is possible to set an age at which benefits become payable, this does not stop it being discrimination if individuals working beyond that age are prevented from accruing benefits.

Insured Benefits

The Response sets out one very interesting development in the area of group risk insured benefits. Responses to the consultation indicated that the removal of the DRA could lead employers to significantly reduce or even withdraw group risk insured benefits altogether. This is because insurers may not offer such benefits for older employees or only do so on unfavourable terms.

The Government appears to be satisfied that the safest way to prevent employers removing group risk insurance benefits is to introduce an exemption to the age discrimination legislation to permit an employer to withdraw such benefits from employees aged 656 and above. This should be helpful where life assurance benefits under pension schemes are insured.

Action

Schemes will need to give serious thought to benefit design for those working beyond NRA; offering no, or lower value benefits is likely to be age discrimination unless it can be objectively justified.

A further consideration is that the removal of the DRA may well lead to an increase in the popularity of flexible retirement. On this issue, schemes need to remember that it is younger employees who may claim age discrimination if the age at which people can take their pension benefits and carry on working is set any higher than the minimum pension age for tax purposes (55 in most cases).

1 For example, income protection, life assurance, sickness and accident insurance, including private medical cover
2 This age will rise in line with the State Pension Age
3 Technically it will still be possible to issue notifications between 30 March and 6 April 2011 but employees given this “short notice” could claim compensation
4 Set out in Schedule 6 of the Employment Equality (Age) Regulations 2006
5 Now under the Equality Act (Age Exceptions for Pension Schemes) Order 2010
6 See footnote 2 above