Age concern

Don’t just hope for the best when it comes to the new age regulation and retirement ages. It pays to have a plan, says Roger Byard

Despite pressure from many interest groups, the Employment Equality (Age) Regulations 2006 do not include a default retirement age for partners in line with those for employees. The consequence of this is that after 1 October 2006, a fixed retirement age will be discriminatory and unlawful unless the chosen age can be justified. To avoid claims a firm will have to identify the aim that it intends to achieve by fixing a retirement age and show that this aim is significant enough to justify compulsory retirement at that age.

In the absence of a clearly lawful retirement age, a key question for partnerships will be how to deal with this issue.

The challenge ahead

Given that any fixed retirement age will be potentially discriminatory, it is almost certain that many firms will keep to their existing retirement ages and wait to see what happens. This strategy will obviously carry the risk of being open to challenge by a retiring partner. If the retirement age set out in an existing partnership deed is simply retained, it will be difficult, if not impossible, to demonstrate an objective justification, as the age was fixed before the concept of age discrimination became law.

To show an objective justification it seems likely that a tribunal would look at the processes underlying the discriminatory decision and look for evidence that the retirement age was selected by reference to a specific aim. In the absence of any process to choose the retirement age, it is difficult to see how a partnership could successfully defend such a claim.

As a practical minimum, a partnership intending to retain a compulsory retirement age should consider formally its existing retirement age in order to identify the rationale for setting and record the reasons why that particular age is appropriate.

Such a process is likely to be challenging and may well, in itself, demonstrate quite how arbitrary the choice of a common retirement age is. Even if a partnership undertakes this exercise, while the partners may accept a particular age and its justification as a group, in larger partnerships it is likely to reflect a consensus rather than unanimity. The consequence could be claims from individual partners when they are required to retire. Once again, a tribunal would examine the selection of the chosen retirement age and could still find that either the setting of a retirement age, or the choice of the specific age, was not justified.

Partnerships deciding to adopt this course will be left in the uncertain position of not knowing whether they have got it right until the first cases under the new legislation have been decided.

The alternatives

So what alternatives might there be to fixing a retirement age, with its attendant risk of challenge as direct discrimination? Rather than have a ‘one size fits all’ retirement age, could there be another approach that would militate against the risks of discrim- ination, while at the same time introducing increased flexibility into the partnership model?
Some City partners may be in a position to afford to retire in their mid-50s, but for others inadequate pension provision will mean that they will need to continue working well into their 60s. It is also true that partnership retirement ages have fallen in the big firms during recent years, and the age at which partnership is achieved has risen. The latter statistic suggests that a partner appointed later may wish to work later in life as well. Furthermore, the increasing diversity of the profession will undoubtedly challenge traditional career paths.

The regulations were expected to herald the death of lockstep as a remuneration system for partnerships, as the system is based on length of service and is thus indirectly discriminatory towards younger partners. It is now thought to be unlikely that this will happen. One of the key reasons is that the lockstep model is seen as providing the most commonly acceptable system of remuneration within a professional partnership business. Merit-based systems impose a burden in terms of management time and discourage collegiate behaviour. The difficulties of assessing partner performance on a comparative basis are time consuming and could lead to partner disaffection. Assessing management skills in particular is a challenging task, particularly as partnerships remain reluctant to adopt useful tools such as the 360° appraisal model that has taken hold in the finance sector. Lockstep has the merits of certainty and continuity. Where a so-called ‘modified lockstep’ operates, a level of performance assessment is necessarily required, although it does not need the detailed performance scrutiny that a pure meritocracy demands. If lockstep is to survive, perhaps it could play a role in resolving the problem of when partners retire.

Limiting lockstep

It would be possible to fix a partner’s retirement age by reference to the number of years they could be a lockstep partner. This admits a variety of approaches. It could be agreed that no one could be a lockstep partner for more than, say, 30 years. Alternatively, after reaching the top of lockstep a partner could remain a partner for a maximum defined number of years. Inevitably this would introduce a variable retirement age, as it would depend on the age of the partner when they joined the lockstep.

This approach would avoid the problem of having to justify objectively a retirement age reached by consensus and applying it to all. Perhaps most interestingly, the date of retirement could become a matter for individual recognition and negotiation at the time of admission to the partnership. Younger partners would want to secure as lengthy a period in the equity as they could, but it might equally apply to lateral hires coming in at a higher age. The result could be that some partners would retire at 55, while others would not retire until they hit 70.

While retirement will not be a pressing concern for partners in their 30s, both retirement and pension planning will be far higher up the agenda for a partner making a lateral move in their mid-40s. It is clear that the regulations will prevent too low a retirement age being fixed. However, individual partners who agree to a formula that defines how long they could be a lockstep partner would effectively distance the arrangement from the claim that it was age-related, and so the potentially discriminatory issue of retirement age would become something for individual negotiation by each partner.

In an ageing population, the need to provide adequately for retirement means that there is a strong possibility that partners will want to work longer. While many partnerships will simply leave it well alone and wait to see if their fixed retirement ages are challenged, a more innovative approach might encourage partners to think more carefully about their long-term aspirations and expectations within the partnership, and how they might achieve them. While it will not remove the need for appropriate performance-related appraisals, such a scheme would make it even more difficult for partners to be compulsorily retired other than on the strongest evidence of them failing to perform. If the partnership model is to continue to be viable in the 21st century, it is essential for it to be more flexible.

Roger Byard is a partner at Cripps Harries Hall