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John Lawson on Pensions

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At last a decision has been taken on how the Government intends to implement the age discrimination strand of the equal treatment in employment directive. When implemented, these new rules will have a significant impact on pensions.

The European Parliament passed the directive in November 2000. It is a wide-ranging document covering many forms of discrimination in the workplace. In the case of discrimination on the grounds of religion or sexual orientation, society had already decided such practices were unacceptable. Putting rules in place to counter these forms of discrimination was therefore relatively straightforward.

However, age discrimination has proved problematic. The Department of Trade and Industy brought employer and employee groups together in early 2004 to achieve an agreed position but this never looked like happening. So, on December 14 the Government made a decision to implement the new rules with a default age of 65.

In simple terms, this means employers cannot dismiss any employee before 65 unless they can prove the employee is no longer competent. Employers will be obliged to consider requests to work beyond 65 or any earlier retirement age set by the employer. The terms on which the employer can decline this request are still to be set out but it is likely they will need to objectively justify their decision.

Looking at the consequences for pensions, an example that springs to mind is tiered contributions in money-purchase schemes. These schemes are often set up to mimic the defined-benefit schemes they replaced. Such workplaces now have 25and 50-year-olds doing the same jobs but the latter receiving higher employer contributions to their personal or occupational pensions. This clearly discriminates against younger workers and is unsustainable.

In discrimination cases involving money-purchase schemes, the European Court of Justice has consistently found in favour of equal contributions. If employers resist this change, they could be forced to backdate the change to the date of this directive.

Less obvious examples are continued payment of employer contributions to money-purchase schemes and further accrual in defined-benefit schemes after normal retirement age. Just because an employee is over 60 does not mean they should not accrue another 60th of earnings. It is just as well the Inland Revenue has removed the old rules limiting benefits from occupational schemes to two-thirds of final earnings. Within a generation, workers could be building up 50/60ths or even 60/60ths.

Employers need to avoid employment practices that give rise to indirect discrimination. This happens where a policy applies to all employees but inadvertently discriminates against one group. This might happen when contributions increase with length of service, with the highest employer contribution given for those with, say, 30 years unbroken service. In such a workplace, it is clearly impossible for any employee in their 20s or 30s to obtain the highest contribution, yet it would be possible for those in their late 40s onwards. Again, this sort of practice will ultimately have to end.

Regulations are due to be published for consultation in the summer. Bearing in mind these rules take effect on October 1, 2006, this does not give employers a long time to prepare. All the more reason why IFAs should be speaking to employers now.

John Lawson is marketing technical manager at Standard Life

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