UK Employment Alert 145: Objectively justifying age discrimination in the UK - pensions
October 19, 2007
Background
In Bloxham v Freshfields Bruckhaus Deringer, the ET considered objective justification in a pensions context under the Employment Equality (Age) Regulations 2006 (the “Regulations”). One question the ET was asked to consider, if it found there to have been discrimination on the grounds of age, was whether that discrimination was justifiable under the Regulations (i.e. was it objectively justified on the basis that the employer was pursuing a legitimate aim by proportionate means).
The facts
F is a law firm operating as a partnership. The partners share in the profits of the firm under a system by which individuals are allocated a number of points on becoming a partner. Those points increase each year the individual remains until a maximum is reached. Each partner’s share in the profits is proportionate to the number of points held by that partner.
F’s historic pension arrangements were also based on F’s profit share points, points being awarded to individuals based on years’ service as a partner. The pension points of retired partners were therefore taken into account in each year’s profit allocation, so that F’s aggregate profits were divided by the total number of points held by current and retired partners. The pension points were subject to a cap whereby if they exceeded 10% of all points, their value would be scaled back to 10% of profits. Older generation A’s retirement could therefore be said to be paid by younger generation B.
No pension was awarded to partners retiring from F prior to age 50. F’s consent was required for retirement between ages 50 and 54 and retirement prior to age 55 was accompanied by a reduction in the level of pension of between 20% and 40%. No consent to retirement was required and no reduction applied to pensions of partners retiring after age 55.
The number of F’s partners had increased substantially since the pension scheme was established. There was a growing sense of intergenerational unfairness, which could have impacted detrimentally on F’s business, since the current pension model was not sustainable and the cap was soon to “bite”.
In 2003 F first considered amending its pension scheme with a view to replacing it with a less costly, and therefore less generous, scheme. It took legal and benefits advice, consulted partners and, following the consultations, revised its initial proposals and put in place transitional arrangements for the age 50-54 partners. The transitional arrangements allowed the age 50-54 partners to mitigate the financial effect of the reduction. If they retired from F prior to 31 October 2006, they would receive the historic scheme benefits (albeit reduced). Additionally, they were able to continue in employment with F as consultants. If they remained as partners and retired after 31 October 2006, their pension would be based on the less beneficial reformed system. The transition period ran from 1 May to 31 October 2006.
Crucially for B the transitional arrangements were not in place for a sufficient period to allow him to reach age 55 and thereby acquire a right to an unreduced pension if he retired prior to 31 October 2006; B’s pension still suffered a 20% reduction when he elected to retire from F on 27 July 2006 with effect from 31 October 2006 at age 54. B alleged he had suffered discrimination by F on the grounds of his age contrary to the Regulations as he could now no longer avoid having the 20% reduction applied to his pension. B compared himself with partners aged either 55 and over as at 30 April 2006 or whose birthdays fell between 1 May and 31 October 2006. He could have remained either as a partner, or became a consultant and deferred drawing his pension, to mitigate the financial effect on him of the pension reform. B presented his claim on 21 November 2006.
The employment and pensions law aspects of the Regulations came into force on 1 October 2006 and 1 December 2006 respectively.
The Decision
Did the ET have jurisdiction to hear the claim? Yes. The relevant act in relation to the imposition of the 20% reduction took place not when it had been (historically) agreed, but over a period of time which continued after 1 October 2006.
Was the treatment (20% reduction) discriminatory? Yes. The treatment in terms of the application of the reduction or not gave rise to a different answer in the case of a 55 year old than in the case of a 54 year old. Therefore B was treated less favourably than those aged 55 or over on 30 April 2006. Such treatment is discriminatory unless justified.
Was it objectively justified in that it had a legitimate aim? Yes. It is for employers to prove on the balance of probabilities that the treatment is a proportionate means of achieving a legitimate aim. The ET also considered that it would be “an error of law to focus solely upon the treatment and not consider the context in which the treatment occurs”. The potential detrimental impact to F’s business of not reforming its pension provisions was relevant.
Was it objective justification in that it was proportionate? Yes. (a) the reform was necessary; (b) the reform involved the balance of conflicting interest between different generations; (c) one of the main drivers had been the unfairness of the historic arrangements to younger partners; (d) the aim was extremely important to F; (e) a reasonable transition period for those with ‘pension rights’ was provided; (f) the solution was the product of extensive work, analysis, consultation and taken after receipt of expert professional legal and benefit advice; (g) every concern raised by partners had been addressed and not rejected without full reasons being given; and (h) the reforms were subject to the consent of a 2/3 majority of partners.
It is worth noting that no alternative, less discriminatory solution was put forward.
B’s claim was dismissed on the basis that although some aspects of B’s treatment were age discriminatory, this discrimination was justified as it was a proportionate means of achieving the legitimate aim of providing a more financially sustainable and fairer pension scheme.
What this means for employers
Although the ET’s decision is not binding, it does provide a useful illustration of how to approach “objective justification”.
Employers should consider consultation with affected parties, even though an exemption from the usual pensions consultation requirements exists where amendments are made to a scheme to comply with the Regulations.
The ET commented that employers should consider “the effect on employees of different age groups whenever a change to a pension scheme or employment policy is concerned”. Employers may therefore be indirectly required to undertake more “research, evaluation and reflection than hitherto”, since the ET noted that if an act or event occurs by reference to a specific date which by reason of their age at that date affects some employees but not others to their disadvantage, the employer may have to justify the disadvantage to avoid a finding of discrimination.
Employers will be aware of the exemptions that apply (in relation to occupational pension schemes) to the closure of sections of schemes, a scheme section being defined by reference to a feature of the scheme (e.g. benefit provided by or access to the scheme) on a particular date which is not present before or, more usually, after that date. Consideration should be given to structuring similar reforms so as to take advantage of these exemptions.
