Guest opinion: New laws may discourage retention of plus-65s

Certain terms and conditions around pensions and insured perks mean employers may be reluctant to retain staff over 65 years who they would otherwise have kept on, says James Davies, joint head of employment and incentives at Lewis Silkin.

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Age discrimination laws are aimed primarily at tackling the premature dismissal of older workers and stereotypical age-based assumptions in recruitment. The most difficult challenges for employers, however, are not in these areas but around certain employee benefits. Perks linked to service discriminate indirectly on grounds of age, as shorter-serving staff will generally be younger, and so will be lawful only if justified. These perks are also present in almost all workplaces. There has been no upswell of discontent from younger workers at the inequalities of increasing holiday with years of service or providing long-service awards.

During the government’s consultation it recognised the implications of risk-averse employers having to justify each service-related benefit, which is likely to lead to a levelling down of benefits. Unfortunately, it was not prepared to exempt these benefits in their entirety. However, these are partially exempt, meaning that employers should be able to reward loyal staff without undue risk. Unhelpfully, representations about the impact of the new laws on insured benefits fell on deaf ears. The problem arises from the regulations being limited to “employment” and not goods and services (at least for the moment) so insurers remain free to discriminate on the grounds of age. Employers, however, can only discriminate if they can justify age-based treatments.

Problems arise with private medical insurance, life assurance, critical illness cover and income protection/long-term disability insurance. Insurers often increase premiums for older workers, particularly those aged over 65, refuse cover beyond particular ages or require older workers to pass a medical before being given cover. It seems unlikely that cost alone can justify age discrimination so employers will not be able to pass on increased premiums to individuals. This creates particular difficulties with flexible benefits schemes where older employees currently have to pay more for the same benefit. In cases where an existing insurer refuses cover, employers will be expected to look to the market. If unsuccessful, larger organisations, in particular, may be expected to self-insure. Income protection/long-term disability cover poses its own problems.

These schemes provide a proportion of pay through to retirement. The regulations are causing many employers to raise pension ages to 65 years so they will need to consider the impact on any staff currently in receipt of income protection payments. Pensions, of course, are inexorably linked to age. Notwithstanding a schedule of pensions exemptions, employers should not be under the misapprehension that pensions will be unaffected by the regulations. It is unlikely that an employer could lawfully cease employer contributions beyond a particular age. Unlike these other benefits, the redundancy pay provisions in the final regulations came as a surprise and did not benefit from detailed consultation. An exception within the regulations for enhanced redundancy payments only applies where the enhanced scheme mirrors the statutory redundancy scheme, including, in particular, keeping the age bands used in calculating statutory redundancy pay.

Very few schemes are structured in this way and the vast majority will not benefit from the exception. Furthermore, the exception for service-related benefits will not apply as it does not cover termination payments. Service and age-based aspects of enhanced schemes will need to be justified. This will not be straightforward and many employers are cursing regulatory haste for this part. An unintended consequence of the problems with insured benefits and pensions might well be that employers are reluctant to retain workers over 65 years that they would happily have kept on before age laws were introduced. And benefits found to breach the regulations will be levelled upwards, potentially at great cost. Employers only have until 1 October to evaluate the risks and make changes.