Age is one of the more recently added protected characteristics that is covered under the Equality Act 2010 ("Equality Act"). It became unlawful to discriminate on the basis of age in 2006. The emerging case law in this area continues to be of interest and develop what is and is not acceptable by the UK courts when it comes to practices that distinguish between individuals based on their age.
Just before Christmas last year, the Court of Appeal issued its potentially far-reaching decision in The Lord Chancellor and Secretary of State for Justice v McCloud and others. The Court held that transitional provisions introduced in line with changes being made to the judges' pension scheme and, separately, the firefighters' pension scheme, were discriminatory on the basis of age, and could not be objectively justified.
The decision serves as a stark warning that any compensatory or transitional protections offered to members in scheme change exercises need to be scrutinised carefully to ensure that they do not constitute unlawful age discrimination if they result in different treatment of members on the basis of their age.
Here our Combined Human Resources Solutions experts look at the decision in more detail, and the implications for employers and trustees who are looking to manage liabilities within their pension schemes.
What were the issues involved in the firefighters and pensions case?
This important decision looked at whether transitional protections offered to older judges and firefighters in their respective pension schemes to either fully or partially cushion them from wide-scale changes being made to future pension benefits were directly age discriminatory, on the basis that younger members of the respective pension scheme were offered no such protection.
Although these cases involved separate workforces (and schemes), because of the similarity of the issues involved, the issues were heard and considered together by the Court of Appeal.
What did the transitional provisions do?
Broadly, the transitional provisions in both cases gave some active members of the existing, more generous scheme full or partial protection under that scheme by reference to the member's age. The consequence of these transitional provisions was that:
- older members who were closer to retirement had full protection in terms of their pension rights - i.e. they were allowed to remain in their current, more generous, pension arrangement;
- members who were slightly younger had 'some protection'; and
- members who were younger still, and who would reach normal retirement date after a certain cut-off were offered no protection at all.
Why were the transitional provisions introduced?
The intended aim behind such transitional provisions was a much stated Government desire to protect those closest to retirement from the effects of the pension reforms.
What was the basis of the younger members' claims?
Younger pension scheme members, who had either limited or no transitional protection, claimed that the protections constituted unlawful direct age discrimination on the basis they treated them less favourably and could not be justified.
The claimants also claimed that the provisions breached equal pay principles and constituted indirect race discrimination, arguing that the transitional provisions placed women and those of black and minority ethnic backgrounds judges and firefighters (who tended to be younger) at a particular disadvantage.
The financial impact of the different treatment for younger pension scheme members in both cases was significant. It was estimated that a firefighter who was too young to benefit from the transitional protection would need to make an investment of £16,000 - £19,000 a year to provide the same benefits as older members who had been given the protection.
For judges, because of a combination of the lack of transitional provisions for younger members, and the fact the new pension arrangement offered to them was on a different tax basis, the cost of providing the benefits they had lost out on was calculated to be at least £30,000 a year.
What did the Court decide?
The Court of Appeal held that the age discrimination claims of both the judges and the firefighters were made out. The employers had failed to show that their treatment of the claimants was a proportionate means of achieving a legitimate aim. It also dismissed the Employment Appeal Tribunal's order that the firefighters' decision should be remitted to the employment tribunal for a re-hearing on the issue of proportionality.
Given that the age discrimination claims were successful, the court held that the equal pay and indirect race discrimination claims were "of no real practical significance" but did state that the claims were made out in the judges' case and could also have been in the firefighters' case (subject to one issue which would have needed to be remitted if necessary).
If the transitional provisions distinguished between people on the basis of age, isn't that obviously discriminatory?
Age discrimination is fairly unique in terms of the protections offered by the Equality Act, in that even direct age discrimination (i.e. less favourable treatment on the basis of age), is not necessarily unlawful if it can be objectively justified. To be able to demonstrate the measure was objectively justified, the employer in each case needed to satisfy the Court that:
- there was a legitimate aim; and
- the means used to achieve that aim were proportionate.
For direct discrimination, case law has established that the legitimate aim forming the basis of the objective justification must be consistent with the broad social and economic policy objectives of the government.
A key issue of law discussed was the margin of discretion to be applied by the courts - the Court of Appeal confirmed that it was for the court to afford the government some margin of discretion in relation to both the aims and means (being the two limbs of the objective justification test that needed to be satisfied), but it was then for the courts to determine what the appropriate margin should be in each case.
Here the Government had not provided sufficient evidence to support its rationale for the protective, transitional provisions. In the case of the judges, there was "just no evidence" that older judges did need more protection than younger judges. Similarly, in the case of firefighters, the Government's Counsel put forward claims that "it felt right" to protect older firefighters and the decision to do so "was a moral decision" were held by the court to be "not good enough".
Having failed at the first hurdle of the objective justification test, the Court only briefly looked at the issue of proportionality. In relation to judges, it commented that the addition to the reforms, which made younger judges worse off, the requirement for the younger judges to participate in an registered pension scheme (with disadvantageous tax consequences) was in itself a disproportionate means of achieving any legitimate intended aim.
So what does this mean?
It remains to be seen whether an appeal will be made to the Supreme Court by the Government in this case. However, if the Supreme Court provides the same answer as the Court of Appeal, or if no appeal is allowed, the costs of sorting this out will be significant: the Government will need to compensate younger members for the less favourable treatment they have received since the transitional provisions came into force, as well as working out how to revisit the pension scheme changes going forward so that the discriminatory elements are removed for all members. They will essentially have to revisit a liability management exercise that they had thought was done and dusted.
Comparable changes have been made to other public sector pension schemes over recent years, including tapering or transitional protections for the members of those schemes. Therefore, for public sector employers who introduced similar transitional protections in relation to their schemes, the implications of this decision could be significant, with the risk of their liability management exercises also being challenged.
Is the decision also important for private sector employers and trustees?
Yes. Whilst the marked distinction in treatment in this case did partially stem from it being a public sector pension scheme, any employer who is considering making changes to their pension provision should think carefully about any transitional protections or concessions they offer to employees to ease that change, particularly where those are only offered to people of a certain age or age group. Even seemingly neutral protections (i.e. to a particular membership group rather than age category) can have discriminatory outcomes if they favour employees of a particular age.
Trustees may also need to question the structure of liability management exercises presented to them by employees if they are of the view that it could lead to discriminatory treatment between scheme members. Any blanket reassurances by the scheme sponsor that provisions protect people of a particular age should be supported by evidence within the particular context of the workforce in question as a means of sharing the necessary objective justification to defeat any subsequent claims of age discrimination.