Age-related contribution rates to an occupational pension scheme can be objectively justified

4 minute read
26 November 2013

A recent decision from the Court of Justice of the European Union (CJEU) looked at whether or not the practice of age-related contribution levels in an occupational pension scheme would be prohibited on the grounds of being unlawful age discrimination. The decision in HK Danmark v Experian A/S, [2013] EUECJ C-476/11 provided some comfort for employers and trustees, as the CJEU found that the practice was capable of being objectively justified.

However, in looking at their own pension practices, employers and trustees will still need to consider whether or not it falls within a particular exemption, or if not, whether or not a particular practice is objectively justified in fact, and in relation to their own particular scheme and circumstances.

The Equality Act 2010 prohibits discrimination against an individual based on their age. However, there are a number of statutory exemptions in the UK which apply to this overriding principle. Logically, a number of those exemptions apply to the administration and rules relating to pension schemes. That makes total sense: age is inherent and pervasive to the very concept of providing a pension, which is primarily an "old-age benefit".

In the case of HK Danmark v Experian A/S, the CJEU was asked to consider the lawfulness of a pension scheme where the employer provided that employer and employee contribution rates increased in accordance with certain age brackets. The employee argued that this was unlawful age discrimination.

The CJEU decided that although the Member States could not allow a legal situation in which an employer can pay pension contributions which increase with age under a specific exemption provided by EU law, such a practice was nevertheless capable of being objectively justified.

The employer in question explained its aims were:

  1. to enable older workers who enter service at a later stage in their working life to build up reasonable retirement savings over a relatively short contribution period, and
  2. to include young workers in the same occupational pension scheme at an early stage, while making it possible for them to have at their disposal a larger proportion of their wages, taking into account the lower rate of employee contribution that applied to them.

The employer also asserted that the increases in pension contributions were justified by the need to cover the risks of death, incapacity and serious illness, the costs of which increase with age.

The CJEU held these aims may be regarded as legitimate and that it would not be unreasonable to regard the age-related increases as enabling the aims to be achieved. It deferred the question of whether or not the practice was objectively justified in the facts of this particular case, back to the domestic court.

What does this outcome mean?

The decision will be welcomed by employers and trustees, as the CJEU is of the view that age-related contributions are capable of being objectively justified. However, objective justification very much turns on the facts of the specific case being considered. There is no blanket approach that can, or should, be applied by employers and trustees intending to rely on it.

In the UK, a specific exemption relating to age-related contributions to pension schemes is contained in the Equality Act 2010. It is possible this could be challenged or reviewed following the CJEU's judgment that the practice of having age-related contributions does not fall within a specific exemption relating to occupational pension schemes that is outlined in the Equal Treatment Directive (Directive 2000/78/EC Establishing a General Framework for Equal Treatment in Employment and Occupation). However, that would be an issue for the UK government rather than employers.

Regardless of whether or not that review happens, given the approach needed to successfully demonstrate objective justification, and the fact that exemptions are interpreted narrowly by the courts, employers and trustees would be advised to review the rationale they have for setting or introducing different pension contribution rates based on their employees' ages.

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Related   Pensions, Discrimination