Two recent Employment Appeal Tribunal (EAT) decisions highlight how pension scheme changes can put younger employees at a disadvantage and be discriminatory on the grounds of age.
When an employer makes changes to employees’ pension benefits it is not uncommon for there to be transitional arrangements put in place to try and “soften” the effect of the changes for certain groups of employees – such as those are close to their normal pension age (NPA).
Transitional provisions are usually linked to age. For example, employees within a certain age range might be exempt from the pension changes altogether.
Age-related transitional provisions have recently been challenged as discriminatory on the grounds of age in respect of changes introduced to two public sector pension schemes for the judiciary and firefighters. The reform of these schemes was intended to reduce the cost to the public purse but were implemented in such a way that claims of age discrimination were made by younger members of the schemes.
What is age discrimination?
Direct age discrimination involves less favourable treatment on the grounds of age. However, unlike other types of discrimination, such treatment will only be unlawful if the employer cannot show that it was a proportionate means of achieving a legitimate aim. In a nutshell this means being able to show a good business reason for the treatment and that it could not be achieved in a less discriminatory way.
The judges’ pension scheme
The first case, McCloud and others v Lord Chancellor and Secretary of State for Justice and another , concerned judges’ pensions – specifically, age-based transitional provisions in the Judicial Pensions Regulations 2015.
These provisions meant older judges (within 10 years of their NPA) could stay in the existing pension scheme, while others transferred to the new, less attractive scheme. More than 200 judges complained that the provisions were discriminatory on the grounds of age.
The EAT agreed with an employment tribunal’s original decision, ruling that the provisions unlawfully discriminated against younger judges. The EAT also agreed that the “extremely severe” discriminatory impact on younger judges outweighed the benefits of applying a consistent pension policy across the public sector. This meant the transitional measures were not proportionate and were therefore unlawful.
According to the EAT, it is up to a tribunal to determine whether provisions are proportionate.
The firefighters’ pension scheme
The second case centred on age-related transitional provisions in the Firefighters’ Pension Scheme 2015. The provisions meant that employees within 10 years of NPA would stay in the old pension scheme, which was more favourable than the new scheme, while those who were more than 14 years from NPA would move straight into the new scheme. Benefits were tapered for those who fell into the 10–14-year bracket.
In Sargeant and others v London Fire and Emergency Planning Authority and others , the EAT reversed a tribunal’s decision that the age-related provisions were not discriminatory. The EAT did not dispute that the aims for such provisions (namely, protecting those who are close to retirement, creating consistency across the public sector, and providing a tapering arrangement) were legitimate. However, the appeal was successful on the grounds that the tribunal did not scrutinise the proportionality of such measures carefully enough. In other words, the tribunal was wrong to give the government a “margin of discretion” in determining proportionality, and, in line with the McCloud case, the tribunal should have made up its own mind on whether the measures were proportionate.
This case has been referred back to the employment tribunal for a further hearing.
What this means for employers
Changes to pension benefits can be particularly emotive for those involved. However, as costs soar for employers pension reform seems inevitable, particularly in the remaining, generous defined benefit schemes (which many public sector schemes are).
Having some sort of transitional arrangement in order to avoid a “cliff edge” for all pension scheme members seems like a fair thing to include. However, employers can find themselves attempting a tricky balancing act – be too generous to older members and risk discrimination claims from younger members or, fail to alleviate the particularly negative impact on older members to a large enough extent and risk discrimination claims from them!
Whether transitional measures are proportionate is a complex issue which ultimately only an employment tribunal can decide. However, specialist advice in this area is a must for any employer considering pension changes and those affected by them.