Permanent health insurance: avoiding age discrimination in cut off for cover

01 July 2021

An exemption in the Equality Act 2010 (2010 Act) (the exemption) allows employers to stop offering permanent health insurance (PHI) and other group-risk insured benefits to employees at the greater of age 65 or the state pension age (paragraph 14, schedule 9, 2010 Act). The policy decision sitting behind the exemption was to avoid employers paying disproportionately large insurance premiums in respect of older employees.

This has been a vexed area since its introduction as the exemption is deceptively simple and can catch employers out. There is very little case law offering guidance around how employers might apply the exemption, however, an employment tribunal has provided a new interpretation of how it might apply (Pelter v Buro Four Project Services Limited ET/2203004/2019).



The exemption's problem areas

When the default retirement age was removed in 2011, employers no longer had a legitimate reason for dismissing employees on reaching a certain age (Employment Equality (Repeal of Retirement Age Provisions) Regulations 2011 (SI 2011/1069). This allows employees to remain in employment for as long as they want to continue working, regardless of age.

Employers that stop providing group-risk benefits to employees at an age that falls within the exemption have a defence against a claim of age discrimination. By contrast, employers that stop providing the benefit at a different age, for example age 70, cannot rely on the exemption and must be in a position to objectively justify the practice in order to avoid a successful age discrimination claim.

Some of the problematic issues include:

  • With the rising state pension age, whether an employer whose insured benefit provision originally fell within the exemption (by stopping the provision at age 65) arguably no longer falls within the exemption where an employee's state pension age has increased.
  • Whether there is a distinction between the date on which the insured benefit was offered and the date on which the benefit crystallised.
  • Whether the employer is required to offer an alternative PHI policy with a higher cut-off age to an employee who is already benefitting from the PHI cover and absent from work. If the employer is required to do this, a further problem is that it may not be possible to procure an alternative policy.
  • Whether an employer can rely on the insurers rules as a means of defending itself against an age discrimination claim.
  • To what extent objective justification grounds can be applied where the exemption does not apply.

Case law before Pelter

Up until 2021, there had been just three cases about how employers should operate PHI policies, which came to very different conclusions.

Whitham v Capita

Whitham v Capita Insurance Services Ltd has generally been considered to be the high watermark decision in terms of the tribunals expectations of employers that offer PHI cover (ET/2505448/12). The tribunal found that Capita, Mr Whithams employer, discriminated against Mr Whitham because of his age by stopping PHI payments at age 55, which was the termination date for that scheme. This was found to be both direct and indirect age discrimination.

Capita had stopped paying Mr Whithams benefits under the PHI scheme once he reached 55 because the insurer would no longer pay out under the terms of the scheme. Capita had another scheme in place for its employees which was available up to the age of 65 for the payment of benefits. Capita did not include Mr Whitham in that scheme as he was not "actively at work" and so did not qualify.

The tribunal did not accept that Capita could not move Mr Whitham to another PHI policy because he was not actively at work. Instead, the tribunal held that Capitas decision to no longer pay Mr Whitham the PHI payments after he had reached 55 was purely based on costs grounds. This was not a proportionate means of achieving a legitimate aim and so the tribunal made a finding of direct discrimination.

In relation to indirect discrimination, the provision, criterion or practice (PCP) was not allowing employees access to a PHI scheme unless they were actively at work. This placed employees aged 45 and above at a particular disadvantage as they were more likely to suffer ill health and, impliedly, less likely to be actively at work. Therefore, indirect age discrimination was made out.

Hall v Xerox

Hall v Xerox UK Ltd concerned a discrimination claim under the Fixed-term Employees (Prevention of Less Favourable Treatment) Regulations 2002 (SI 2002/2034) (UKEAT/0061/14; www.practicallaw.com/0-584-9549). Mr Halls fixed-term contract was due to expire during the 26-week qualifying period for PHI cover. The insurer rejected the PHI claim, even though the employer, Xerox, had renewed the fixed term. Xerox refused to make PHI payments to Mr Hall because the insurer refused to admit him as a member.

The Employment Appeal Tribunal (EAT), agreeing with the tribunals decision, rejected Mr Halls discrimination claim. The reason why Mr Hall did not get the PHI benefit was because the insurer refused to pay, which was an act of the insurer, not of Xerox. It was accepted that there was no realistic alternative approach for Xerox, as it was bound by the apparently universal approach taken by insurance providers on this point.

Smith v Gartner

In Smith v Gartner UK Ltd, Ms Smith claimed direct age discrimination due to her PHI benefit ending at age 60, which was the PHI schemes termination date when she joined the scheme, instead of payments ending at age 65, which was her retirement age at the time the benefit stopped and the termination date for her employers, Gartner, new PHI scheme (UKEAT/0279/15). The insurer refused to make any further payments under Ms Smiths PHI scheme. Ms Smith was unable to join Gartners alternative PHI scheme as she was not actively at work.

The EAT held that the tribunal was correct to find that the contractual documents required the employer only to provide a PHI scheme and not to make further payments to the employee if payments were not made by the insurer. Although Ms Smiths appeal failed as the EAT held that there was no breach of contract (due to the way the question on appeal was framed), the EAT went on to also consider, obiter, the issue of age discrimination. The EAT found that there was no direct age discrimination because the reason Ms Smith could not benefit from the new schemes terms with the higher retirement age was because she was already benefitting under the old scheme. The difference in treatment was therefore not due to age but the fact that she was already in receipt of benefits and not actively at work.

Therefore, Smith is a potentially helpful contrast to Whitham, with the EAT accepting that the insurers rules can justify an employer not moving an employee to another PHI scheme.

Lack of clarity

It is difficult to draw clear conclusions from these cases:

  • Whitham is only a first instance tribunal decision and so does not bind other courts. Also, it would now be unusual for the cut-off age for the provision of PHI benefits to be as low as age 55, which perhaps was partly why the tribunal found so firmly in favour of Mr Whitham.
  • While an appellate decision, Smith was argued in unusual circumstances by way of written submissions to the EAT and also with a focus on the contractual provisions rather than the alleged age discrimination, so caution is needed in applying Smith more widely.
  • Hall is also a potentially challenging decision. Employers must not discriminate in relation to the various protected grounds. It would therefore be unwise for an employer to rely too heavily on a conclusion that an employer can justify its discrimination by relying on the insurers rules.

A new interpretation

Mr Pelter was employed by Buro Four Project Services Limited. He went on sick leave in 2011. His sickness absence started under the terms of the PHI scheme on that date and he received payments of more than £16,000 a month. At the time, his state pension age was 65 years. Payments under the PHI policy ceased in 2020 when Mr Pelters reached the age of 65. During this period, Mr Pelters state pension age increased to 66 years, with effect from 2012.

Mr Pelter bought claims of direct and indirect age discrimination on the basis that the PHI scheme stopped providing benefits at the age of 65. He argued that it should continue to provide benefits until at least age 66 years, being his current state pension age.

The tribunal rejected his claims and held that the change in state pension age did not entitle Mr Pelter to membership of a scheme that ceased benefits at 66 years rather than 65 years.

Direct discrimination

The tribunal found that Buros obligation to provide access to benefits in a non-discriminatory way applied to the provision of the PHI benefits to all employees. All employees were entitled to join the PHI scheme and the conditions for eligibility were not unlawfully discriminatory.

The benefit included a potentially age discriminatory element in that the terminal age for the receipt of benefits was 65. However, at the time that the PHI scheme was entered into, Mr Pelters state pension age was 65. At that date, the scheme therefore fell within the exemption and did not amount to unlawful discrimination on grounds of age.

Importantly, the tribunal held that, once the benefit is crystallised, the obligation to provide access to the benefit in a non-discriminatory manner as required by the 2010 Act is no longer the focus as the benefit has been triggered and access has been realised.

The tribunal rejected Mr Pelters argument that there is a continuing obligation to renew the terms of the benefits received by the claimant where the terms are those imposed by the insurer providing the benefit.

The reason Mr Pelters payments under the PHI scheme stopped in 2020 was because he had reached the age of 65. It was therefore directly connected to his age, which was the terminal age under the PHI policy. This was within the rules of the PHI scheme which Mr Pelter was claiming under, since he made his PHI claim in 2011.

The tribunal therefore followed the EATs approach in Hall and found that the discriminatory act was that of the insurer, not Buro.

The tribunal also accepted Buros evidence that it would have been impossible to transfer Mr Pelter to another scheme while he was claiming benefits as he was a known liability and not a risk that an insurance company could assess. This was not directly related to his age but to his status as someone already claiming a PHI benefit under the scheme. The tribunal preferred the conclusions of the EAT in Smith to those of the tribunal in Whitham.

The tribunal also concluded that Buro could, as matter of law, argue justification under the normal justification provisions, in addition to the exemption. As Mr Pelter had a state pension age of 66, the withdrawal of benefits at age 65 did not fall within the exemption at the time when the benefit was stopped. The tribunal found that it did, however, apply to the scheme at the time when Mr Pelters benefits crystallised.

The tribunal concluded that even if its conclusions in relation to the application of the exemption were wrong, it considered that the terminal age of 65 was a proportionate means of achieving a legitimate aim.

Given that cost alone cannot be valid justification, the tribunal rejected Buros argument that self-funding the difference would affect succession planning in that Mr Pelter was not blocking a place on the board.

However, the tribunal accepted that paying a large sum out of the companys income to self-fund continued provision of Mr Pelters PHI benefits would affect the money available for bonuses and other benefits to staff, which would affect the fairness of distribution of benefits and competitiveness in the labour market. For this reason, stopping the PHI benefit at age 65 could be objectively justified.

As ever, each case will be fact specific. A tribunal might not have reached the same conclusion on objective justification had Mr Pelter not been in receipt of such a large PHI benefit.

Indirect discrimination

The tribunal was also unwilling to accept Mr Pelters claim of indirect age discrimination. It considered that the relevant PCP was the provision of PHI benefits on the terms of the relevant PHI scheme, those terms being dependent on the date of entry into the scheme.

The PCP that employees in receipt of PHI payments were not permitted to move to a more favourable scheme was a provision imposed by the insurer, not the employer, and so fell within the exemption.

Tips for employers

While there is case law precedent for the argument that a discriminatory act of an insurer can mean that the employer is not liable for the alleged act of discrimination (Hall and Pelter), there is cause to question how reliable that conclusion is. Fundamentally, the employer has the legal duty not to discriminate in an employment context. An employer should remain cautious of concluding that it can discriminate by simply relying on an insurers terms.

More helpful is the conclusion that an employee is not entitled to be transferred onto a new PHI scheme or new PHI terms when they are already in receipt of PHI. The rationale is clear; the employee is already benefitting from the scheme and is not entitled to join a new scheme simply because their state pension age has increased while they have been in receipt of PHI.

The case law does not answer what happens where an employee has an entitlement to access a PHI scheme subject to meeting its qualifying conditions, where the benefit ceases at 65, but where the employees state pension age is higher than 65. Employers should regularly review and update their PHI provision to ensure that they can still rely on the exemption and, where necessary, increase the termination date for the policy terms so as to mirror the rising state pension age and, if not, consider their objective justification grounds.

It is understood that Pelter is being appealed. Clarity at appellate level would be welcome for employers and for employees benefiting from PHI provision alike.

*This article first appeared in the July 2021 issue of PLC Magazine, published by Practical Law, part of Thomson Reuters (Professional) UK Limited, and is reproduced by agreement with the publishers.


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