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New age of muddle
March 2007
Andrew Powell, International Trade Today
It has been said that any good intention translated into legislation rarely has the intended effect. In implementing age discrimination obligations placed upon it by the European Union, the UK has entangled itself in a web of complexity in trying to meet them while, at the same time, avoiding yet another blow to its beleaguered pensions industry. The move to outlaw age discrimination in the workplace derives from the EU Equal Treatment Directive. Formulated in 2000, it had a built-in delay that allowed implementation to be set back to October 2006. The Regulations initially published (The Employment Equality (Age) Regulations 2006) were proffered as a comprehensive piece of legislation to deal with all aspects of age discrimination, including the field of pension provision.
These Regulations took effect on 1 October 2006. However, the relevant part of the Regulations (Regulation 11 and Schedule 2) dealing with pensions issues were deferred until 1 December 2006.
WHAT WENT WRONG?
The initial response of the UK Government seemed complacent; the framework for pensions in the UK either were, or could easily be, exempted from any negative effect of the implementation of the EU Directive. The pensions aspects of the Regulations set out a long list of exemptions, some of which derived specifically from those set out under the EU Directive.
In addition, a catch-all exemption, such that a practice could be seen to be objectively justifiable in relation to both direct and indirect discrimination, seemed to provide a ‘get out jail free’ card to those whose arrangements could not easily be captured even in a long list.
Specific exemptions were tailored to meet admission to schemes, actuarial calculations and contributions. There were further exemptions relating to early and late retirement, pension increases, bridging pensions and scheme closures. It is easy to see how these might have appeared to fit the bill. However, the sheer diversity of the pensions industry proved this to be incorrect.
THE PROBLEM IN DETAIL
Particular difficulty arose from the prescriptive nature of the exemptions. Offsets to integrate with the state system and changes to benefits between early retirement and state pension age (bridging) were allowable under the original draft only if they conformed to the prescribed formula. Moreover, the concept of indirect discrimination raised its head so that issues arose even as to whether protections enjoyed by pre-1987 members or dependants’ benefits were affected because, inevitably, these practices have a disproportionate effect on members in certain age groups.
Whilst some of the anomalies identified by critics seemed somewhat fanciful, the sheer weight and number of the potential difficulties was unnerving.
As if this were not bad enough, the Department of Trade and Industry (DTI) issued draft Guidance that seemed at odds with the Regulations and appeared to raise many more questions than it answered.
STRUGGLING FOR A SOLUTION
Faced with enormous pressure from the pensions industry, the only thing that could be done was to postpone the original draft and then substantially redraft it. In this regard, the Department of Work and Pensions is to be commended for getting to grips with what had become a herculean task. In consequence, the
Employment Equality (Age) (Amendment No 2) Regulations 2006 came into force on 1 December 2006.
So what do they do? Unfortunately, at such a late stage it was not possible to move away from the concept of a prescriptive list. Nevertheless, it was recognised that it was necessary to formulate further exemptions. The first of these was to recognise that the fact that a particular practice was not contained within the list did not mean that it was necessarily discriminatory.
The second significant change related to providing exemptions for schemes that had within them separate sections relating to different parts of the workforce arising from, for example, transfers from other employment in consequence of corporate activity or from changes made over time (and for which it was necessary to continue to provide a certain benefit only in relation to those who had joined the scheme on or before a particular date).
The amending Regulations also intended to take away some of the difficulties in relation to offsetting to reflect state provision, certain dependants’ benefits and to address the issues arising in consequence of changes in practice by HMR&C. Changes to the provisions relating to early retirement and redundancy, in particular dealing specifically with the issue of employer consent, were also implemented.
One of the issues that is worthy of particular comment concerns the contribution rates under defined contribution arrangements. It is common practice for this type of provision to have a contribution rate that increases with age in order to reflect, albeit very crudely, the fact that more money is needed to provide a pound of pension for an older person than for a younger one as it is invested for a shorter period.
Sadly, although the practice was seen as benign by the UK Government and not outlawed by the Directive, the drafting of a suitable exemption proved problematical. The first attempt seemed to demand a degree of exactitude that was very unwelcome. However, common sense appears to have prevailed and any increase in contributions aimed at providing a greater degree of equality of pension provision should be acceptable.
The latest version of the DTI Guidance was seen by the pensions industry as something of a disappointment. It was hoped that much of the dialogue that had taken place with the relevant Government departments would be translated into a plain but full guide as to how, in practice, employers were expected to implement the relevant requirements.
Sadly, the Guidance seems to have retreated from the length and breadth of its original form and settled for a bland presentation, which does not add as much as, perhaps, it could.
WHAT HAPPENS NEXT?
The difficulties relating to the regulatory regime have not entirely abated. Whilst most schemes appear now to have little to fear, there will still be a materially significant number of issues to be wrestled with by those employers who sponsor less straightforward arrangements. Inevitably, the law will develop piecemeal as the tribunals and the UK courts try to deal with the problems that will arise. Ultimately, further guidance will be needed from the European Court of Justice.
At EU level, it has to be said that the more targeted use of the concept as incorporated in the law of the United States of America may have proved more positive. That is to say, that age discrimination should be seen in its proper context. It is primarily a doctrine that should assist the old. More generally, a generic form of exemption of the type adopted by the Irish government might have proved to be more helpful.
CONCLUSION
It was once said that one of the great thing about the British is that they do not drive home thin ends of wedges. For this particular piece of legislation it is to be hoped that this will prove to be true. At the end of the day, the great edifice that was the UK pension industry is already in danger of collapse. This legislation could prove to be another major undermining factor if common sense does not prevail. In particular, it is to be hoped that tribunals and courts will take a liberal and purposive view of this legislation and strive to ensure that there are no further unintended consequences of benign ideas.
