The great leveller
27 November 2006
Age discrimination is a hot topic, with far-reaching anti-discrimination provisions applying to pension arrangements from 1 December this year. But trustees and employers have been hampered in their preparations for the new legislation by important changes to the regulations being announced very late.
Following intense lobbying, the Department for Work and Pensions (DWP) agreed to amend the pension provisions of the Employment Equality (Age) Regulations 2006 and to postpone their implementation from 1 October to 1 December this year. But what is the impact of the amending regulations issued on 10 November?
Pensions are inherently age discriminatory, as individuals receive them when they are old and not when they are young. The age regulations and the amending regulations contain exemptions for many common benefits provided by pension schemes. While these are welcome, they also leave some important gaps.
Where a discriminatory practice is not covered by an exemption and cannot be justified objectively , trustees will be obliged to 'level up' and provide benefits at the higher level for all affected members. Benefits can be levelled down, but changes cannot be made retrospectively. Benefits built up before 1 December are exempt.
Trustees and employers should be identifying discriminatory practices that will become unlawful on 1 December. Taking steps to avoid unlawful discrimination (and to limit or avoid any additional cost to the employer) is especially challenging because:
The amending regulations are helpful because, like the age regulations, they exempt some common practices that might otherwise constitute unlawful discrimination. Benefits and practices covered by the new exemptions include:
Although the exemption for some age-related contributions to defined contribution arrangements has been amended, it does not provide the certainty pension lawyers have sought. Further clarification will be contained in revised guidance.
A fundamental issue is whether it will be lawful to have members in comparable situations being entitled to different pension benefits, depending on when they joined the employer or the pension scheme. It is common for employers to offer less valuable pension benefits to new recruits, such as a defined contribution arrangement rather than membership of a defined benefit scheme, or to require new joiners to pay contributions where existing members pay none. Different benefit structures may also arise following acquisitions, if new employees continue accruing benefits on the basis that applied with their old employer.
So, why might the provision of these different benefits be age discriminatory? The answer is that a group of members who became entitled to participate in a particular benefit arrangement during the same period will tend, over time, to become older than more recent recruits. If this group receives more valuable benefits, a younger employee could claim that the difference in treatment constitutes age discrimination.
Fortunately, the age regulations, as amended, help by exempting the closure of a 'scheme' or a 'section' of a scheme to new joiners. This means that continuing to run, for example, a defined benefit pension scheme (or section) for existing employees, but offering only a defined contribution scheme (or section) for new recruits, will be acceptable.
A burning issue for pension lawyers has been what constitutes a 'section'? A very restrictive definition in a previous draft has been removed from the final amending regulations. 'Section' is now defined by reference to particular benefit structures for groups of members who continued joined on, after or before a particular date. Thanks to the exemption for closing a section, providing higher pension benefits to employees who joined the scheme before a certain date, but who are otherwise in a comparable situation to new employees, will be lawful.
Amendment of the regulations means that issues arise for trustees where a scheme provides different benefits to different groups of members and more than one of these benefit structures is open to new joiners. Depending on the age profile of each of these 'sections', the difference in benefits provided could amount to unlawful age discrimination. To maintain the same benefit provision for all groups, it may be necessary to demerge the scheme so that each section remaining open to new members becomes a separate scheme, or alternatively to provide future service benefits for all but one section's members under a separate scheme or schemes.
No matter how thoroughly pension scheme documents are reviewed, there may be practices that are subsequently found to be unlawfully discriminatory. As explained above, if unlawful practices continue after 1 December, benefits for all affected members have to be levelled up until benefits are levelled down for future service.
A solution might be to include a general levelling down clause in a deed of amendment before (or as soon as possible after) 1 December. Such a provision should provide that any term of the scheme that discriminates unlawfully is levelled down with effect from 1 December (or the date of the amendment, if later), even though it may not be known if or how the provision will have effect. Levelling down must apply from 1 December (or the date of the amendment), not from the date on which the problem term comes to light.
If employers wish, they could amend the scheme rules subsequently to increase benefits to negate the levelling down, but trustees may have reservations about such a clause.
Levelling down clauses need to be drafted carefully and it is uncertain whether they will always work. However, given that the alternative is to rely on having identified each and every unlawful discriminatory practice, or to risk having to provide increased benefits in respect of past service, it is worth seeking to include such a provision in amending deeds.
Katie Banks is a partner and Jill Clucas is a professional support lawyer at Lovells