Abolition of the Default Retirement Age Confirmed Today?
Posted: Thursday 13 January 2011
The headlines are telling us that the Government has, this morning, confirmed that they will indeed be abolishing the default retirement age of 65. But is this not something we already knew?
Current Law
Under current UK legislation, employers can dismiss someone fairly when they reach the age of 65. All they require to do is follow a set procedure which involves telling the employee (6-12 months in advance) that they intend to retire them when they reach age 65 and that they may request to remain in employment longer. If the employee makes a request to work on beyond 65, then the employer must consider that request and follow a timetable of meetings with the employee about it. There is, however, no obligation to allow the request and the employer can currently insist on the employee retiring at 65.
The Consultation Process to date
The question of whether or not the existence of a default retirement age is appropriate or necessary in modern society was first raised by the previous Government as part of their strategy entitled Building a Society for All Ages. In order to consider public opinion on this, the Department for Business Innovation & Skills and the Department for Work and Pensions conducted a joint review, seeking input from businesses, employer associations and individuals. The difference in opinion was stark – only 10% of businesses/employer associations responding were in favour of abolishing the default retirement age. By contrast, 72% of employees favoured it. The principal concerns which were held about abolition were (1) the effect of this on opportunities for younger workers to progress; (2) concerns about the impact of having older workers in employment on the cost of certain employee benefits, such as private medical insurance, death in service benefit, critical illness cover etc; and (3) an increased burden on employers to deal with capability issues which can arise with older workers.
Following this feedback (and a change of Government), a consultation document was published in July 2010, setting out more concrete proposals and seeking views on the proposals. What it didn’t do was seek views again on the principal issue. The consultation document confirmed that “The Government has decided to phase out the DRA”. What it did seek views on was the abolition of the “right to remain” procedure (as described above), input on whether or not the proposals struck the right balance and further input about the effect on insured benefits and Employee Share Schemes.
So we already knew that the default retirement age was being abolished.
What then is the significance of what has happened today?
What in fact has happened is that the Government has published its Response to the July Consultation Paper. In addition ACAS have also published guidance for employers. So what more do we actually know, following today’s news?
It has been confirmed that the current regime of requesting to remain beyond retirement will disappear.
The current procedure can still be used for employees who are due to retire before 1 October 2011. Since a minimum of 6 months notice has to be given, the last date on which notification can be served without penalty will be 30 March 2011. There are also short notice rules, which can still be operated before 6 April 2011, but an employee could claim up to 8 weeks pay as compensation. On 6 April, the short notice rules will be abolished. Therefore, if the existing process has not been commenced before 6 April 2011, then it will not be open to employers to use and they will not be able to force an employee to retire on their 65th birthday.
It has been confirmed that retirement will no longer be listed as a potentially fair reason for dismissal.
At the moment, retirement is listed in the Employment Rights Act as one of the potentially fair reasons for an employer to dismiss an employee. This will no longer be the case.
The majority of people responding to the consultation expressed concerns about employers having to rely on the other potentially fair reasons (capability or qualifications, conduct, redundancy, breach of statute or some other substantial reason). Employers were uncomfortable about the increased use of capability/poor performance procedures and concerns were expressed about an increase in age discrimination claims. The Government’s response is that the DRA should not be used as an alternative to fair and consistent performance management and guidance has been issued to mitigate the risk of an increase in age discrimination claims. In other words, employers’ concerns on this have largely been ignored.
There will be no statutory Code of Practice on the subject of retirement discussions.
Despite most responses favouring the existence of a statutory Code of Practice to follow in relation to having discussions with people about retirement, the Government has refused to do this and has instead stated that employers should use the ACAS guidance instead. The guidance will not be compulsory, but will serve as a guide to best practice. In other words, if employers follow it, they should be fine, but there’s no guarantee, leaving open the possibility of claims being made against them anyway.
The transitional arrangements for phasing out the DRA will remain as proposed in the Consultation.
Despite some concerns that this was all happening too quickly, the Government have confirmed that the proposed timetable of phasing out the DRA by 1 October 2011 will remain in place.
There will be an exception to the principle of equal treatment on the grounds of age for group risk insured benefits provided by employers.
In order to meet the concerns expressed about the increased cost of providing benefits, the Government have confirmed that there will be an exception in relation to this. However, they have also confirmed that they have no plans to amend the current legislation on employee share schemes. Companies will therefore potentially have to review their good leaver provisions as departure by reason of retirement is generally listed in employee share schemes as one of the good leaver provisions. Departure by reason of lack of capability is, generally, a bad leaver provision (with financial consequences for the employee). With older workers potentially being forced to depart because they are no longer fit enough to carry our their role, companies will have to give close consideration to how these schemes might be amended to reflect a departure which is fundamentally based on the effects of old age.
Please remember…
Please remember that these provisions are phasing out compulsory retirement. These provisions do not mean that individuals cannot retire at 65. They simply mean that the timing of retirement becomes a matter of choice for the employee, not a matter of compulsion. A departure from employment on the grounds of retirement at a date which suits both parties will not be a “dismissal” – the termination will be by mutual agreement.
What to do now….
Firstly, read the ACAS guidance. It is only 16 pages long. It recommends that you:-
- Have regular conversations with all employees about their future plans. Do not restrict this to older workers. It’s good to know where all of your employees see themselves in the short and longer term. This allows you to make plans to allow them to achieve their career goals.
- Address poor performance consistently for all workers. Capability to do the job is something an employer is entitled to expect from all employees.
- Consider whether or not your organisation can justify a set retirement age. This may still be possible. You must be able to objectively justify it though. This is likely to apply where there are good reasons for having a retirement age, such as careers requiring a significant level of physical fitness (emergency services) or mental fitness (air-traffic controllers). It must be a proportionate response to a legitimate aim. If you are doing this, you must focus on the reason for it (i.e. the legitimate aim) and make sure that there is no less discriminatory way of achieving that aim. You will need evidence to support your position, in case you are challenged on this – assertions alone will not be enough.
- If you do set a fixed retirement age, you must still follow a fair procedure. Give adequate notice of impending retirement and consider any request to stay beyond that date. Requests to remain must be treated consistently.
- Set work objectives and expectations. These should not be different for different ages unless this can be objectively justified.
- Group insured benefits can be withdrawn once the employee has reached age 65 (or the State Pension Age for men, once this increases). The age for withdrawal will increase in line with increases to the State Pension Age.
- Just because you have a contractual agreement with an employee that they will retire at a certain age, that is unlikely to have any legal force. You would need the equivalent of a Compromise Agreement for the employee to validly waive his/her employment rights and a Compromise Agreement only works if an employee has a particular claim to waive. Of course, you could still enter a Compromise Agreement with an employee where you were trying to force a retiral, but you would do this at that point. You couldn’t do it at the start of employment or during employment when you are going about the normal business of putting in place contractual terms governing employment.
Secondly, have a discussion at a strategic level about the changes which have been made and the impact of this on your organisation. It may well be that management would prefer to retain a compulsory retirement age in order to ensure that there are opportunities for career progression for younger workers. Management will need to understand the type of evidence that might be required to mitigate the risk of successful claims being made against the organisation. However, management might decide that the benefits outweigh the risks and to deal with any claims as they arise. Remember though that if a claim is made and includes an age discrimination claim as well as an unfair dismissal claim, then the potential level of compensation that could be awarded is uncapped.
Thirdly, review your policies and procedures. This is likely to include your:
- Standard contracts of employment – review any retirement provisions
- Appraisal procedure/forms – incorporate short and long term career progression provisions and ensure that these discussions start to happen as a matter of course. You may need to provide support to managers to explain the purpose behind these and why they should be having them with everyone.
- Termination provisions in an Employee Handbook – these are likely to contain a statement about automatic termination at 65.
- Retirement procedure – if you have one, it probably reflects the current statutory “Right to request to remain” scheme. This should be abolished unless you are retaining a compulsory retirement age which is objectively justifiable.
- Any provisions about employee insured benefits – if you wish to do so, these should be reviewed to reflect that they will not be provided beyond age 65 (or State Pension Age for men, if different). You might decide to continue to cover all employees, but before doing so, you should check the cost of this with the insurer to see whether or not your premium will increase as a result of no longer having a fixed retirement age.
- Employee Share Option Schemes and any other schemes which involve good leaver provisions which refer to termination by retirement.
- Equal Opportunities Policy – remove any out of date references to retirement. Make sure, at the same time, that it is in line with the provisions contained in the Equality Act 2010, particularly in relation to the changes made to disability discrimination.
- Capability/poor performance procedure – you may wish to include a statement that it will be applied consistently to all employees.
- Any Occupational Pension Scheme - the abolition of a compulsory retirement age is likely to affect some of the assumptions on which the funding of final salary schemes is based. If you have a final salary scheme in place, check with your pension advisers whether or not changes require to be made to the Scheme rules and whether or not you have a funding issue that will require to be addressed. If you have a money purchase scheme, then there are less fundamental issues to be addressed, but your Scheme rules may still require to be amended to reflect the new regime. Remember – you no longer actually have to stop working to be able to draw a lump sum and a pension under an occupational pension scheme. This depends on the Scheme rules and is likely to become more of an issue now that people will be working beyond 65. Think about what you want to achieve and whether or not people are more likely to want to stay in employment if they can also draw their pension at the same time. If you are thinking about adapting the rules of the Scheme, you will need to do so in consultation with employees.
Fourthly, be prepared for any questions you may be asked about Pensions. The prospect of being able to work longer may prompt employees to think about their financial plans and to ask for your input. Bear in mind that there are radical changes being made to pensions from 2012 onwards. By 2014, employers of all sizes will be compelled to provide workplace pensions with employer contributions. Businesses should also think about how to budget for this, if they aren’t already doing so.
Lindsey Cartwright, Partner, Employment Team
