The UK Government has now issued its response to its consultation “Phasing out the Default Retirement Age”, confirming that the default retirement age (DRA) of 65 will be abolished from 1 October 2011. The last retirement notice under the current procedure should be issued by no later than 30 March 2011, so employers have very little time to prepare. We understand draft Regulations will be laid before Parliament by the end of this month and will come into effect on 6 April 2011.

The Government has stuck to its original proposal that, from 6 April 2011, employers will no longer be able to issue notices of retirement under the DRA procedure. In practice, notices must be issued by 30 March 2011 as the current procedure requires employers to give no less than 6 and no more than 12 months notice of retirement. Notices can be issued after 30 March 2011 and before 6 April under the short notice provisions but the employee could claim compensation of up to 8 weeks’ wages as a result. Where notifications have already been made prior to 6 April 2011, employers will be able to continue with retirement procedure, as long as the retirement is due to take place before 1 October 2011. Retirement notices already issued which provide for a retirement date on or after 1 October 2011 will be void.

No retirements using the DRA procedure will be possible from 1 October 2011. After that date it will only be possible to retire a particular employee at a particular age if the employer can objectively justify that age for retirement. This will be very difficult to do other than in particular professions (such as those requiring significant physical fitness) and will require substantial supporting evidence.

Most importantly for employers, the Government has responded to employer concerns (as communicated by us in our response to the consultation) as regards group risk insured benefits (such as medical insurance, death in service and income protection). The Government’s proposal is to provide an exemption so that employers will be able to exclude employees aged over 65 (such age rising in line with increases in the State Pension Age) from benefits under these schemes, without risk of age discrimination claims being brought. This has been a particular concern for our clients, and so it will come as a relief to many employers who will be able to continue to operate existing schemes without incurring inflated costs. We await the draft Regulations to determine which schemes will be captured by the exemption.

ACAS has now issued guidance for employers “Working without the default retirement age.” While this has been designed to assist employers rather than set statutory guidelines, we recommend that all employers read this carefully. In addition to the new ACAS guidance, the Government recommends that employers look at the guidance already available through the Age Positive Initiative. This gives information on how to review retirement practices, manage performance and flexible approaches to retirement without the use of a fixed retirement age.

The Government’s main conclusions

Reed Smith submitted a response to the Government’s consultation and, as a result, has been named as one of the respondents listed in Annex A to the Government’s Response. In our response, we raised several concerns, some of which the Government has addressed. These are considered below against the Government’s main conclusions:

1.      All administrative procedures associated with the DRA will be removed. This means that even if employers wish to retire employees using an employer objectively justified retirement age, they will not be required to follow the current statutory procedure set out in Schedule 6 of the previous Employment Equality (Age) Regulations 2006 (requiring notification of retirement and the “right to request” working past the retirement age). However, they will still need to ensure that a fair procedure is followed in order to safeguard against any unfair dismissal claims. According to the new ACAS guidance, this will involve considering any request by an employee to stay beyond the compulsory retirement age.

2.      “Retirement” will no longer be a fair reason for dismissal. We raised this as a particular concern in our response and the Government has addressed this by stating that they will make it clear through guidance that retiring an individual, when a retirement age is objectively justified, amounts to “some other substantial reason” and is therefore a potentially fair reason for dismissal. Although the new ACAS guidance considers how employers need to follow a fair procedure, it does not currently specifically deal with this point. Having spoken to the Government’s senior policy adviser, we understand this is an oversight and ACAS will be issuing revised guidance to deal with this point.

3.      Guidance, rather than a more prescriptive Code of Practice, is considered by the Government to be preferable in supporting employers to manage older workers. We agree that formal guidance is preferable to a statutory Code since it gives employers more flexibility to interpret the legal framework to fit with business needs. The Government rejected a Code of Practice because it would not necessarily provide the legal certainty which some respondents thought it would give, and any penalty for failure to follow the Code (such as an uplift in compensation in line with the current ACAS Code for disciplinary dismissals) would be a “heavy handed” way of implementing a policy aimed at facilitating open discussions about future plans between employers and employees.

4.      The Government has played down employer concerns that dismissals using capability and performance procedures are likely to increase, which in turn will lead to an increase in age discrimination claims. The Government believes that the guidance issued by ACAS should mitigate the risk of an increase in age discrimination claims by use of effective performance management methods. The Government agrees with the views of many respondents that the DRA should not be used in place of effective performance management.

5.      The Government confirmed the original timing of the abolition of the DRA and the six months’ transitional period starting on 6 April 2011. Although we agree with the six month transitional period, we are concerned that the current timetable gives employers very little time to prepare. The Government says that the costs of the transition will soon be off-set by the benefits to be derived from removal of the DRA and associated procedures. Such benefits are stated as being “to the economy, individuals and business from increased economic activity, increased labour supply and the removal of the administrative costs of the DRA procedures”. However, the Government has missed the point as cost is not the only issue. Employers have not, until now (mid-January 2011), had any certainty about the proposed timetable or, more importantly, the nature of the change. Even now, the draft Regulations have not yet been published. Employers will have to make rapid decisions as to whether to have an Employer Justified Retirement Age. This will involve gathering substantial evidence and taking legal advice. A knee jerk reaction to this will be for employers to protect their position by issuing retirement notices to all employees who are either approaching or have now reached 65, perhaps in circumstances where they would not otherwise have done so. This is a significant disadvantage with the timetable which the Government has failed to address in their Response.

6.      There will be a specific exemption for group risk insured benefits (income protection, life assurance and sickness and accident insurance, including private medical cover). This is to be welcomed since the increased cost of providing these benefits to over 65s could lead to employers scrapping these benefits altogether for all workers. This exemption will mean that employers can lawfully discriminate (depending on the nature of the benefit offered) against employees aged over 65 by not providing them with benefits which are available to the rest of the workforce. Before employers can sit back and relax, it is important to look carefully at the wording of the proposed exemption set out in the Regulations which are yet to be issued. It is of note that the Government refers to “group risk” insurance benefits, so the provision of benefits outside this definition will not presumably fall within the exemption.

7.      There will be no exemption as regards employee share schemes which contain “good” and “bad” leaver clauses. The concern is that it will be difficult to distinguish between employees who are retiring and those who are voluntary leavers; a retiree is normally a good leaver so will be treated more beneficially under the scheme than a person who voluntarily resigns, so will be a bad leaver. Although it is a shame that the Government has not addressed the employer concerns here, we consider that the problem can be overcome by addressing the drafting of the relevant scheme.

What should employers do now?

  • Read the new ACAS guidance and the Age Positive publications.
  • Consider whether to issue any retirement notices by 30 March 2011.
  • Review any retirement notices already sent out to check the proposed retirement date does not fall on or after 1October 2011.
  • Consider the position of employees aged over 65 who have already been granted the right to continue working beyond age 65.
  • Consider how the proposed changes will impact on your organisation: how will you deal with older workers in the future?
  • If compulsory retirement is preferred, take advice on whether this is a real possibility for your organisation and whether you could objectively justify a retirement age.
  • If no compulsory retirement age is to be used:
    • introduce informal workplace discussions where the issue of retirement can be raised with older workers;
    • consider whether performance management, recruitment procedures and flexible working procedures need to be amended; and
    • consider offering retraining or flexible working to older employees.
  • Once the draft Regulations are published, take advice on the precise wording of the exemption on group risk insured benefits for the over 65s to assess whether it will apply to your particular arrangements.
  • Review the terms of any employee share schemes so that future retirees are protected.
  • Review the draft Regulations, once published.
  • Consider training on the new law and new procedures for your managers and staff.

We can provide the detailed advice which your organisation may require having considered the full impact of the Government’s response to the consultation. We will also be providing training. Please contact Graham Green for more information or your usual contact in the Reed Smith Employment Group.