Trustee briefing: default retirement age
Engaged Investor explains the recent default retirement age ruling
The default retirement age – the age at which employers can insist an employee retire – was scrapped in October 2011, making it illegal to force workers to stop working because of their age. However, a legal ruling this week by the Supreme Court has made matters more complex.
A partner at a City law firm who was told to retire after reaching 65 sued his employer for age discrimination – crucially, the decision to retire the lawyer was taken before the DRA was scrapped – but the appeal was unanimously rejected by the Supreme Court.
The Court said the lawyer’s partnership deed contained specific clauses designed to ensure succession at the firm and argued that fairness between generations was a legitimate reason to retire older workers. Its verdict said that employers should take into account ‘public interest’ when telling people to retire, but referred the actual age this could take place back to the employment tribunal.
However, a report by the Pensions Policy Institute (PPI) has warned that almost half (45%) of today’s over 50s would have to work and save for eleven years or more beyond their State Pension Age to replicate their working life living standards in retirement.
Niki Cleal, PPI director, said: “Many people need to start saving more today, if they want to avoid having to work much longer than they planned and want to have an adequate retirement income in the future.”
What does this mean for trustees?
The ruling has established the principle that there can be legitimate reasons for a firm to retire older employees who have reached pensionable age, although it has not yet clarified the exact age at which employees can be told to retire.
The ruling means fairness between generations and reasonable succession – ensuring that the top positions in a businesses are not unduly occupied by workers at or approaching retirement age, just because of their age and length of service with a business and at the expense of more junior employees – are justifiable causes to force someone to retire.
More widely, the ruling means employers can force older workers to retire if there is a justifiable and proportionate reason to do so.
However, Neil Carberry, Confederation of British Industry director for employment & skills policy, said more detail was needed from the government if trustees were to be able to use the ruling: “This ruling confirms that, at least in principle, companies are able to set their own retirement age. However, this does nothing to fill the vacuum left by the Government’s scrapping of the Default Retirement Age.
“If employers want to set a retirement age that is suitable for their workforce, and know for sure whether it is legitimate, they will still have to go through a costly and lengthy legal process.
“The Government cannot continue to pass the buck. Employers need to know how to handle the sensitive issue of retirement, with adequate protection to discuss plans with their staff, and better guidance on when a retirement age is justifiable.”
Scrapping the DRA has been less of an issue than some may have a major shift in pension provision than many have claimed, since it now reflects the reality that many people either do not want to, or cannot afford to, retire once they reach 65.
The idea that people will have work till they drop if a false one – while employers will not be able to automatically get rid of people at 65, they will have to develop transparent processes, not that dissimilar from those used to get rid of people under 65, based on either redundancy or competence.
For defined benefit (DB) schemes, this change should make little practical difference. Schemes will be allowed to keep their normal retirement age of 65 and treat those working beyond that age as late retirees.
The challenge is greater for defined contribution (DC) schemes, where investment strategies are tailored to deliver a lump sum at 65. Uncertainty about a retirement age will require changes to the decumulation phase of DC saving to reflect this, as current strategies work towards a set goal of a retirement age or year.
More details are needed from the government or the courts on what constitutes a justifiable reason to force an employee to retire. Employers will need some clear legal principles to protect themselves from litigation.