Managing without a fixed retirement age
The Government has abolished the default retirement age, removing the ability of employers to dismiss employees by retiring them at the age of 65, except in limited circumstances. We look at the legislation and the guidance provided to help employers manage older employees, and consider the developing case law.
On this page:
Provisions of the Regulations
Effect on pension benefits
Guidance on retirement
Box 1: Some frequently asked questions about working without the DRA
Box 2: Acas e-learning course on age discrimination
Employer justified retirement age
Retirement age case law
Future impact on DRA abolition.
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Key points
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The concept of a normal retirement age was only developed in the early part of the 20th century, mainly after the introduction of the state pension scheme. Now, 100 years later, it seems the concept is set to disappear after the previous Government decided that it would abolish the default retirement age (DRA) of 65 introduced in 2006 by the Age Equality Regulations. The current administration lost little time after taking power in proceeding with the abolition, and Regulations took effect on 6 April 2011.
The Government's response (on the Department for Business, Innovation and Skills website) to its consultation on the draft legislation shows that the removal of the DRA elicited strong views. Amazingly, more than 600 responses were received, of which 41% were from individuals. The majority of responses were in favour of the abolition of the DRA. About 56% agreed that the notification and "right to request" procedures, under which an employer had to give six months' notice of its intention to retire an employee and the employee had the right to request to stay on in work, should be removed at the same time.
However, more than half the respondents were concerned that there would be an increase in age discrimination claims as a result of the change, and also in the use of capability and performance procedures to dismiss underperforming older workers. Therefore guidance supporting the legislation has been produced to assist employers with managing older employees.
Provisions of the Regulations
The Regulations are deceptively short, considering their potential impact, and contain three main provisions, namely:
- the abolition of provisions permitting employers to terminate the employment of an employee who reaches age 65, provided the correct procedures were followed, without it being considered unfair dismissal or unlawful age discrimination;
- the abolition of the notification procedure and the right of employees to request that they work beyond age 65; and
- transitional arrangements.
The transitional arrangements appear straightforward but there has been some legal discussion as to when they cease to apply. There is no dispute that these arrangements, which permit retirements under the notification procedure to continue for a short period of time, apply only to notifications made before the effective date of the Regulations (so by 5 April 2011) and where the individual in question attains the age of 65 by 30 September 2011.
If employees who were given notice of retirement by employers on or before 5 April 2011 indicate that they wish to continue to work beyond the planned retirement date, the employer can allow an extension of up to another six months, but any further extension must be limited if the retirement is to be effective. The employee must make the request for an extension before 6 January 2012 and the retirement must take place by 5 October 2012.
However, barrister Daniel Barnett of Outer Temple Chambers believes that for technical reasons the retirement needs to take place by 3 October 2012. He comments that some city law firms think that 4 October 2012 is the last possible date for enforced retirement and wryly notes that only litigation will finally decide the issue.
Effect on pension benefits
The Government made it clear at the outset that the exceptions for pension schemes contained in the original age equality legislation would be unaffected by any changes. It passed the necessary legislation last year to carry forward these exceptions following the enactment of the Equality Act 2010. Hence, provided the necessary conditions are met, pension schemes may still operate minimum and maximum ages for admission and retain a normal pension age. However, many employees find it difficult to separate the concepts of normal retirement age under a pension scheme from retirement age under the employment contract. So pension communications will need to be carefully worded to ensure that employees appreciate that the pension scheme's normal retirement age is not a compulsory retirement age.
Acas comments that employees will need to be reassured that removing the DRA does not mean that they can never retire - it should just give them greater control over the timing of their retirement. It suggests that open discussions between employees and employers about future plans "can help facilitate the transition from work to retirement for both the individual and the business".
In its guidance on employing older workers (external website), Business Link points out that the state pension age is not a "retirement age" as workers can continue working past this age and choose to take or defer their state pension. It recommends that where an employer offers a workplace pension to staff, it should consider reviewing its terms so as to support members who wish to continue in employment past the scheme's normal pension age. Examples of changes it suggests include flexible retirement, allowing older workers to continue to contribute towards a pension or allowing access to a different arrangement. It also points out that older workers will need to consider the implications for their pensions and other benefits of continuing to work.
Concern was expressed during the consultation about the impact of the removal of the DRA on insured risk benefits such as ill-health and life insurance, where premiums increase considerably with age. Accordingly, the Regulations introduce an exception for such benefits by making it lawful for insurance providers to cease offering such benefits to employees aged 65 and over. This age limit will increase in line with the state pension age. Law firm Clifford Chance points out that, although the Regulations permit employers to withdraw insured benefits when an employee reaches a specified age, the employer must ensure that it is not in breach of the employment contract if it does so. It recommends that contracts are drafted to give employers the flexibility to withdraw the benefit.
The same firm also draws attention to the difficulties that may arise under redundancy schemes that provide for a reduction in benefit close to retirement age on the assumption that employees will shortly be taking their pension. It also recommends that the provisions of share schemes and similar arrangements are checked where they have special provisions for retiring employees to ensure that they are not in breach of the legislation.
Guidance on retirement
Nearly 50% of respondents to the consultation on the Regulations supported the idea of having a statutory code of practice, including guidance that covers retirement discussions, on the basis that it would provide employers with legal certainty. However, the Government rejected this view and adopted the position taken by 36% of respondents who favoured developing formal guidance. It believes that this approach offers more flexibility than a code of practice. Accordingly, Acas was requested to ensure that suitable guidance (external website) was available 12 weeks before the Regulations took effect. Business Link also produced guidance (external website), as did the Department for Work and Pensions under its Age Positive brand (external website).
All the guidance covers similar areas, although the Acas booklet is more detailed than the others. It suggests that the removal of the DRA is a good opportunity for employers to review their practices and processes for managing all employees and their employment. It contains useful examples of the kind of practices that may be considered discriminatory in respect of people of all ages. In particular, it suggests that rather than have a discussion with older employees about retirement, employers should base their discussions on workers' plans for the short, medium and long term. Acas's replies to commonly asked questions about handling retirement discussions are reproduced in box 1 and illustrate the fine line that needs to be trodden when discussing the issue. Acas also has an online training course to help employers manage older employees (see box 2 for more details).
The Age Positive guide takes the form of answers to questions dealing with common views about older workers, such as "don't older workers block opportunities for younger workers", and "isn't retiring someone more dignified than using performance management". This guidance refers to a number of case studies illustrating how employers are managing an age-diverse workforce.
Box 1: Some frequently asked questions about working without the DRA
 If I discuss retirement with an older worker can I leave myself open to a claim of age discrimination?
Source: "Working without the default retirement age: Guidance for employers", Acas, extract from questions and answers. |
No, there is no requirement to talk with employees about their future plans but you may find it helpful to do so for your own organisational and succession planning purposes.Box 2: Acas e-learning course on age discrimination Acas has a freely available online course about age discrimination. Most people should be able to complete the course in a couple of hours; many will do it quicker. The course has the following units:
The course is available from the Acas website. |
Employer-justified retirement age
One aspect of the new legislation that has been given less attention is that the Regulations do not repeal the right for an employer to operate a set retirement age, provided it can be objectively justified. Unusually, both direct and indirect age discrimination can be justified in this way. Acas uses the term employer-justified retirement age (EJRA) for this. For an employer to maintain a fixed retirement age, it not only has to be objectively justified, but also has to be a proportionate response to a legitimate aim.
Until April 2011, EJRAs were normally used where the retirement age was below 65. Now they will apply at all ages and Acas notes that the exact meaning of the term will have to be developed by case law. But it suggests that legitimate aims may include: business needs and efficiency; health, welfare and safety of the individual; and the particular training requirement of the job. Acas recommends that employers who wish to pursue this course ask themselves the following questions to check if they can objectively justify their aims:
- Why do we want to do it and can we explain the reasons in writing?
- Do we have concrete evidence (rather than just assumptions) to support our reasons?
- Is there a less discriminatory way of achieving the same result?
Law firm Clifford Chance believes that establishing objective justification will be a significant hurdle for employers to overcome.
Retirement age case law
Many lawyers and business groups expect an increase in the number of cases on this topic. However, a body of case law has already started developing both in the UK domestic courts and at the European Court of Justice (ECJ). Barrister Daniel Barnett says that the two jurisdictions have adopted different approaches to claims. He suggests that the ECJ judgments indicate that it will not be too difficult to justify a mandatory retirement age in Europe.
In one of the early cases, Palacios de la Villa v Cortefiel Servicios SA, Case C-411/05, the ECJ held that the Spanish Government could objectively justify a normal retirement age of 65 as its aim was to distribute work opportunities between the generations. This line of reasoning has been followed in a number of subsequent decisions, one of the most recent being Georgiev v Tehnicheski universitet - Sofia, filial Plovdiv (Cases C-250/09 and C-268/09) concerning a university lecturer who was not permitted to extend his contract of employment after the age of 68.
One of the ECJ's main decisions concerning the UK's rules was the "Heyday" case , which challenged the UK's default retirement age. In this case, the ECJ suggested that direct age discrimination cannot be justified by aims that relate to a particular employer and must relate to national policy issues. When the case came back to the UK High Court, the fact that the then Government had already announced its intention to review the DRA seems to have played a large part in the judge's decision to uphold the DRA in that instance.
UK employment tribunals have taken a less lenient approach towards compulsory retirement ages. In Hampton v Lord Chancellor [2008] IRLR 258, the tribunal rejected an argument that it was necessary to retire recorders at age 65 in order for new blood to enter the judiciary, and there have been a number of similar cases. However, in Seldon v Clarkson, Wright & Jakes [2010] IRLR 865, the forced retirement of a partner in a law firm was upheld by the Court of Appeal on a number of grounds relating to workforce planning and making opportunities for younger people, and also as an appropriate means of limiting the need to expel partners by way of performance management leading to a "congenial" culture in the firm. However, the case has been appealed to the Supreme Court and its decision may be influenced by the abolition of the DRA.
Future impact on DRA abolition
The employment rate among the over-65s is already rising. The latest Office for National Statistics figures show that the employment rate of this group increased by 14.6% in the 12 months up to February 2011. The Government believes that the impact on business of removing the DRA will be of overall benefit. Its impact assessment suggests that there will be a net cost to business in the first year of £15 million, but that individuals are likely to benefit by £105 million through increased earnings. It is estimated that the Exchequer will benefit by £79 million, mainly through increased tax receipts.
However, the CBI believes that the Government has glossed over the consequences of its decision. In particular, it thinks that the law on performance management and unfair dismissal should be simplified and that the meaning of "objective justification" should be properly spelled out.
The Government plans to review the impact of the removal of the DRA in five years, but only as part of a general review of equality law. In the meantime, many organisations will have to adjust to this new retirement-age-free world.
