Age discrimination: the effect on benefits

HR practitioners faced with new, unclear age laws will have to wait for precedents to be set, says Vicki Taylor

Case study: PricewaterhouseCoopers

Article in full

Pensions are one of the trickier areas covered by the age discrimination legislation. Although many exemptions exist, for example, around minimum and maximum entry ages and waiting periods for admission to a scheme, the status of other practices is still unclear. David Pollard, a partner at law firm Freshfields Bruckhaus Deringer, says issues could arise, for example, around the earnings cap. “The earnings cap was applied by the Revenue and only applies if you joined a scheme after 1989. Is that discriminatory? It is more likely that older people won’t be subject to the cap.” Employers will need to ensure healthcare benefits cover employees at least up to the new retirement age of 65 years. Although the cost of providing such benefits is likely to be more for older workers, lawyers say it is unlikely that paying a higher premium will be seen as discriminatory if the benefit is the same.

Problems may arise where employees are paying the premium through a flex scheme but there are ways this can be addressed (see flexible benefits to the right). Cover for employees with a currently admitted claim for income protection up to an age lower than the new retirement age of 65 years will depend on the wording of the policy. Paul Davies, marketing and business director at insurer UnumProvident, says: “Some [policies] will just say that the current provision will continue to the current [retirement] age, while other employers will say it continues until your retirement age.” Where policies state staff will be covered “to retirement”, workers may argue that they intended to stay on until age 65 or beyond. Covering older staff for insurance under a flex scheme is likely to increase the premiums and therefore the amount employees have to spend from their flex budget on cover.

One option is to introduce a flat premium for everyone, but this could potentially discriminate against younger workers. Some lawyers believe parts of the package which are voluntary cannot be seen as discriminatory. Under age discrimination laws, employers can provide service-related perks up to five years of service. After this, it must be able to show that the practice is legitimate to achieving a business aim. However, as Jim Lister, an employment partner at Pannone Solicitors, points out: “What young person is going to complain that someone who has been there for 25 years is given a gift?” The deadline for employers to comply with the Employment Equality (Age) Regulations 2006, which outlaw discrimination against employees on the grounds of age, is drawing near. With this due to come into force on 1 October, all employers should now be in the process of reviewing their benefits packages and retirement ages accordingly.

As simple as that sounds, lawyers and benefits advisers believe that, in some cases, only case law will reveal what action should be taken. While there are certain clear exemptions on what will be considered discriminatory, including service-related benefits up to a maximum of five years and many pensions practices, lawyers believe the regulations don’t exclude pension benefits to the extent the government had previously indicated. David Pollard, a partner at law firm Freshfields Bruckhaus Deringer, says: “There is not a blanket exemption for pensions which is what the government was proposing last year. Quite a lot of pretty common pension benefits are not specifically exempted.” Under the legislation, there is also a defence for employers which can objectively justify age discriminatory practices. For the first time in UK law, the defence of justification will be available in cases of direct, as well as indirect, discrimination. To establish this defence, employers will have to show that the discriminatory practice is a “proportionate means of achieving a legitimate business aim”. However, since this wording has not been tested before, employers may be wary of relying on it. Jim Lister, a partner in the employment department at Pannone Solicitors, believes that once employers are satisfied their practices are not in breach of the legislation, they are best to avoid “seriously mucking around” with their benefits package. “There is a small element of risk because you might be the first [test] case, but the great likelihood is that you won’t be,” he adds. From October, employers will also have to increase their retirement age to 65 years, or scrap it completely.

This means any benefits will need to cover staff at least up to this age, since employees will also have the right to request to work beyond the age of 65. One of the areas that is especially problematic is healthcare benefits, whether these are provided as a core entitlement or through a flexible benefits scheme. Sam Mercer, director of the Employers Forum on Age, says: “From the employer’s perspective on insurance, it is the cost factor, [because] the cost [of cover] goes up dramatically [with age].” On its own, cost is unlikely to be a justification for not providing a benefit to a particular group of staff. While employers will need to ask their insurer to increase cover at least up to the age of 65 years and remove any minimum ages for eligibility, goods and services are not covered by the legislation and are therefore arguably not discriminatory. It is only the way employers use the products that is subject to the question of discrimination, although most insurers accept that employers will no longer use products that are subject to age restrictions of below 65 years.

Paul Davies, marketing and business director at healthcare insurer UnumProvident, says: “We envisage that most employers with less than 65 [years] as a default [retirement] age will want to move their benefits to that basis. Fundamentally, we have structured our products so any employer could now cover people up to age 70 with relative ease.” When healthcare benefits are included in a flex package the regulations are less clear. The problem is that the cost of cover increases the older a person gets, meaning that employees have to pay more out of their flex pot for the cover. This is not seen as a problem by everyone, but the issue may depend on case law for clarification. “[We have taken the view that] where the employee pays for the benefit themselves the employer can’t really be discriminating,” says Davies. One option is to ask insurers to devise a flat-rate premium for all staff, but even this could be problematic. Jamie Winter, a senior consultant at Watson Wyatt, says: “The problem is, if I am a young person, suddenly my cost goes up because I am cross-subsidising the older people. It is a big area of debate [as to] whether you can objectively justify it and [whether it is thought you can] depends who you talk to.” Even benefits such as pay and long-service awards are not exempt from scrutiny.

Michael Bronstein, a partner in the employment department at law firm Salans, says: “In many organisations, you would probably find that older employees tend to get paid more than younger employees. Employers should be looking closely at the mechanisms by which they set and review pay levels to ensure that they are demonstrably age-neutral.” At least organisations grappling with these issues can take comfort from the fact that there are others going over the same grey ground. “Everyone agrees the legislation is worded in a fairly woolly way and it is only going to be case law over time that actually sets the precedent,” Winter explains.

What you need to know…

Pensions

Pensions are one of the trickier areas of the age discrimination legislation. Although many exemptions exist, such as those around minimum and maximum entry ages and waiting periods for admission to a scheme, the status of other practices is still unclear. David Pollard, a partner at law firm Freshfields Bruckhaus Deringer, says issues could arise, for example, around the earnings cap. “The earnings cap was applied by the Revenue and only applies if you joined a scheme before 1989. Is that discriminatory? It is more likely that older people won’t be subject to the cap.”

Healthcare benefits

Employers will need to ensure healthcare benefits cover employees at least up to the new retirement age of 65. Although the cost of providing such benefits is likely to be more for older workers, lawyers say it is unlikely paying more towards a premium will be seen as discriminatory if the benefit is the same. Problems may arise where employees are paying the premium through a flex scheme but there are ways this can be addressed (see box on flexible benefits).

Income protection

Employees with income protection up to an age lower than the new retirement age of 65 years can continue to be covered to that age providing the employer’s policy is clear. Paul Davies, marketing and business director at insurer UnumProvident, says: “Some [policies] will just say that the current provision will continue to the current [retirement] age, while other employers will say it continues until your retirement age.” Where policies state employees will be covered “to retirement”, the employee may argue that they intended to stay on until age 65 or beyond.

Flexible benefits

Covering older employees for insurance under a flexible benefits scheme is likely to increase the premiums and therefore the amount employees have to spend from their flex budget on cover. One option is to introduce a flat premium for everyone, but this could potentially discriminate against younger workers whose costs increase. Some lawyers believe parts of the package which are voluntary cannot be seen as discriminatory.

Long-service awards

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Under age discrimination legislation, employers can provide service-related benefits up to five years of service. After this, it must be able to show that the practice is legitimate to achieving a business aim. However, as Jim Lister, a partner in the employment department at Pannone Solicitors, points out: “What young person is going to complain that someone who has been there for 25 years is given a gift? Unless the award is prodigiously large, it [should] be okay.”

Case study: PricewaterhouseCoopers

After taking legal advice, it has looked at all of its flexible benefits in light of age discrimination legislation. As a result, it has changed one of its policies from an age-related criteria to service-related criteria. Carolyn Wilkinson, senior employee benefits manager at PricewaterhouseCoopers, says some employees used to be given an increase in their flex funding when they reached the age of 30. From 1 October, this increase will take place once an employee has five years’ service instead. She added advice had also been taken on insurance benefits contained in the scheme. “None of [our] core benefits had an age-related price so we haven’t had to make any changes. “Other [optional] benefits, like critical illness and partner life insurance, do have age-related prices and we have investigated with insurers who cannot provide us at this time with a non-age related premium.” The company will also keep a close eye on other insurers and employers as well as any relevant case law that emerges. Wilkinson believes, however, that it will be able to justify the age-related pricing because younger employees could be worse off under a flat-rate premium and because the benefits are voluntary.