In advance of a change in the law, James Walker describes what the removal of the default retirement age could mean to businesses and their employee benefits
On 29 July 2010, the government issued a consultation document titled ‘Phasing out the default retirement age'. This document proposes that from 6 April 2011, you will not be able to issue any notifications for compulsory retirement using the Default Retirement Age (DRA) procedure.
Between 6 April and 1 October, only employees who were notified before 6 April, and whose retirement date is before 1 October can be compulsorily retired.
After 1 October 2011, you'll not be able to use the DRA to compulsorily retire employees. If you wish to use retirement ages, you'll have to be able to demonstrate that these are objectively justified. See below for more details of what this means.
Removal of admin burdens
The consultation also proposes to help employers by removing the administrative burden of statutory retirement procedures. With the DRA removed there is no reason to keep employees' 'right to request' to work beyond retirement or for employers to give them a minimum of six months' notice of retirement.
The current Employment Equality (Age) Regulations 2006 (SI 2006/1031) require the employer to:
- give employees approaching their retirement age at least six months' notice of their proposed retirement date;
- notify employees that they have the right to request to continue working beyond their contractual retirement age;
- and consider such requests.
Once the statutory retirement procedure has been abolished, if companies want to retire an employee they will have to follow a fair procedure under the ordinary unfair dismissal rules and rely on one of the potentially fair reasons for dismissal set out in s.98 of the Employment Rights Act 1996 (capability, conduct, redundancy, illegality or some other substantial reason).
To justify a compulsory retirement age, firms must be able to show that it is a proportionate means of achieving a legitimate aim. ‘Proportionate' means that:
- what the company is doing is actually achieving this aim;
- the discriminatory effect should be significantly outweighed by the importance and benefits of the legitimate aim;
- that there is no reasonable alternative to the action that the firm is taking.
An aim could be ‘legitimate' if it relates to:
- economic factors such as the needs of, and the efficiency of, running a business;
- the health, welfare and safety of the individual (including protection of young people or older workers);
- the particular training requirements of the job.
The aim of saving money by retiring workers (who might, for example, be paid more than a younger worker for doing the same job) is very unlikely to be a legitimate aim.
Firms are likely to need to provide valid evidence if retirement ages are challenged. Most employers have a compulsory retirement age of 65 which they do not currently have to justify. Case law where individual employers have objectively justified retirement is extremely rare. In future companies could potentially face the double threat of age discrimination and unfair dismissal claims from employees who have been compulsorily retired.
An employment tribunal can order compensation to the claimant. There is no maximum amount of compensation so unlimited damages can be awarded in respect of a successful claim.
The damages awarded could include both financial loss and compensation for personal injury (physical and psychiatric) arising from unlawful age discrimination, providing the claimant can show that the injury was directly caused by the discrimination suffered.
Injury to feelings
Damages can also include compensation for injury to feelings, regardless of whether the employee has suffered any direct financial loss as a result of the discrimination. The size of awards for injury to feelings varies depending on the facts of the case and the degree of hurt and distress caused to the claimant by the act of discrimination.
There are currently three broad bands of injury to feelings compensation. The top band is between £18,000 and £30,000 and applies only to the most serious cases. The middle band of £6,000 to £18,000 is used for serious cases that do not merit an award in the highest band and the lower band of between £500 and £6,000 is used for less serious cases, such as where the act of discrimination is an isolated occurrence.
The employment Equality (Age) Regulations 2006 that came into effect on 1 October 2006, make it unlawful for firms to discriminate directly or indirectly against an employee on the grounds of age. The government have indicated that they'll be simplifying and strengthening the discrimination law in October 2010.
Unless the government grant an exemption for group insured benefits, it will be harder to provide the same level of benefits to a company's employees across each peer group, irrespective of their age.
Even if the government agree in November to an exemption that would allow group benefits to cease at a certain age, this will almost certainly be linked to the rapidly increasing state pension age. This means that premiums for traditional group products will inevitably rise, particularly for group income protection where the benefits are payable over a greater length of time. In view of this, advisers may take the view that this would be the ideal time to review the scheme's design and consider moving to a limited term. This could considerably reduce premiums and also limit cost increases going forward.
Responsibilities
It is already a firm's responsibility to not use age as a reason to provide different benefits to its employees. The removal of the default retirement age means that some organisations may have many more employees working beyond the age of 65. If an employee wants to continue working until 80 or more, age cannot be used as a reason not to provide the same benefits. More importantly, it could mean that any employees on long-term sick leave, now or in future will be entitled to receive the same level of benefits ad infinitum. This is on the basis that they could say that they intended to carry on working indefinitely. The costs of providing this benefit could prove a significant drain on resources, and almost certainly mean the cost of insuring the benefit is prohibitively expensive.
Both scenarios present good reasons to start thinking about the options available for group income protection benefits, including limiting the term. Because the same limited term benefit would be provided to all the client organisation's staff, employers could have the peace of mind that they would be fulfilling this element of their age discrimination obligations as well as continuing to provide them with valuable benefits.
James Walker is group protection technical manager at Legal & General
