Age discrimination and pensions - sections solved, or not?
The DWP has today issued important final regulations to amend the pension aspects of the age discrimination regulations. In many respects, the new regulations solve the vital issue of "sections", which has been of great concern to occupational pension provision. Disappointingly, the news is not so good for trustees with more than one section open to new joiners.
Only one section open to new members
What this means is that employers will usually be able to continue to operate different benefit structures for different groups of employees within the same scheme, provided that all but one of the benefit structures are closed to new joiners. In this situation, the regulations will allow each benefit structure, or "section", to be treated as a separate scheme. Examples of arrangements which will usually benefit from this change include:
- defined benefit and defined contribution arrangements within the same scheme;
- applying the Inland Revenue earnings cap only to members who joined the scheme after 1989;
- providing different benefits for members who were transferred to the scheme following a business takeover, to reflect the benefits they were accruing with their previous employer.
Without this exemption, many trustees and employers would have faced the option of offering all active members in a scheme the same benefits going forward, or of demerging their existing scheme into several new schemes, each with its unique benefit structure. Clearly, neither option was attractive in terms of human relations, cost or administration.
Where more than one "section" is open to new members
The position is not so straightforward, however, where more than one benefit structure in the same scheme is open to new members.
Following an amendment to the final regulations, the statutory non-discrimination rule will now apply across all open sections of a scheme, and trustees will be required to operate the scheme as a whole in a non-discriminatory way. Where a section has been closed to new members, the section may be "carved out "and the benefits it provides considered separately to those under different sections.
Issues will arise, however, where two or more sections of a scheme are open to new joiners and the differences in benefits they provide could amount to age discrimination. Such benefits will need to be levelled up unless the trustees can objectively justify the difference in treatment.
The change does not effect the position of employers - as we expected, they may also be vulnerable to successful claims where more than one section (or scheme) is open to new members and a difference in treatment between the sections (or schemes) amounts to age discrimination, unless the difference can be objectively justified.
At first glance, the change to the Age Regulations appears to place trustees and employers in a similar position where more than one section of a scheme is open to new members. However, unlike trustees, employers may take a commercial view about the risks involved and decisions they will take on future benefit design. While our view is that trustees may rely on the employer’s objective justification of a discriminatory practice, not all trustees may be willing to do so. Where trustees do not, they will be obliged to level up benefits to that of the more favoured group of members. One way around this dilemma, from a trustee’s perspective, is to demerge the scheme so that each section remaining open to new members becomes a separate scheme.
Background
Age discrimination legislation is being brought in now to implement a European directive outlawing various forms of discrimination in the workplace, including discrimination on grounds of age. The UK (and other EU member states) has until 2 December this year to put their age discrimination legislation in place.
In the UK, the directive is being implemented through the Employment Equality (Age) Regulations 2006, which were issued in their current form in March this year. In September, the DWP announced that the implementation of the Age Regulations would be delayed from 1 October to 1 December. Amending regulations were issued for consultation on 11 October and contained an extremely restrictive definition of "section". Lovells and many others in the pension industry protested that the consequences of leaving the definition unchanged would be drastic.
Lovells’ views
Stephen Ito, a partner in Lovells’ pension group, said:
"While the relaxation of the definition of "section" is extremely welcome, we are disappointed that the regulations will make the position more difficult for trustees with more than one section open to new joiners. This situation is not unusual, for example, a defined benefit scheme may have a minimum entry age of 30 - which the Age Regulations will allow - but also have a defined contribution section open to younger members. Trustees and employers who are affected should take urgent advice and should consider the possibility of demerger to form separate schemes."