Consultation outcome

Government response: The draft Equality Act (Age Exceptions for Pension Schemes) (Amendment) Order 2019

Updated 24 April 2019

ISBN: 978-1-78659-151-7

Chapter 1: Introduction

1.1. On 16 January 2019 the Department for Work and Pensions published a consultation which sought views on amendments to The Equality Act (Age Exceptions for Pension Schemes) Order 2010 (2010 Order).

1.2. Some occupational pension schemes currently pay one rate of pension when a member reaches the pensionable age under the scheme and a lower rate when the member reaches State Pension age. This is in order to take account of the State Pension the member receives when they reach State Pension age. These are known as ‘bridging pensions’. It means that a member’s pension is actuarially enhanced between scheme retirement date and State Pension age; and actuarially reduced thereafter.

1.3. The practical effect is that the member’s income is smoothed so there are no sudden changes. Provisions in the Equality Act (Age Exceptions for Pension Schemes) Order 2010 permit them to do this without breaching equality requirements relating to age. This practice is known as ‘integration’ or ‘clawback’.

1.4. Because existing legislation is still aligned with the previous State Pension ages, any reduction must currently start between the ages of 60 and 65. However with State Pension age increasing beyond age 65 for men and women from 6 December 2018^{[footnote 1]}, the legislation which provides an exception allowing schemes to reduce the pension payable to members reaching their State Pension age have ceased to apply from this date.

1.5. The Equality Act (Age Exceptions for Pension Schemes) (Amendment) Order 2019 (2019 Order) therefore seeks to amend the 2010 Order so that schemes will be able to continue to operate rules whereby they pay a higher amount of scheme pension before a member reaches their State Pension age and then a lower amount of scheme pension to balance their State Pension when the latter comes into payment. This change would include those reaching State Pension age from 6 December 2018.

1.6. The consultation ended on 30 January 2019. There were 6 written responses from pension industry bodies and pension professionals. We are grateful to everyone who replied. A list of individuals and organisations that responded is at Annex A.

1.7. This response addresses the main issues raised by respondents.

1.8. The Equality Act (Age Exceptions for Pension Schemes) (Amendment) Order 2019 is available on the UK Legislation website.

1.9. This consultation document is available on GOV.UK.

Impact Assessment

1.10. An Impact Assessment has been prepared for this instrument and will be made available alongside the legislation on the UK Legislation website.

Chapter 2: The government’s response to the feedback received on consultation questions 1 to 4 (the draft Order)

Introduction

2.1. The consultation proposed 4 questions concerning the consultation draft Order. Chapter 2 summarises the comments received and sets out the government’s response. The article numbers in the headings refer to the numbering in the final Order.

2.2. When reading these responses, you may find it helpful to refer to the original consultation which provides the context.

The draft Equality Act (Age exceptions for pension schemes) (Amendment) Order 2019

Article 2

Question 1: Do you agree that the proposed change provided by draft article 2(2) will ensure that pension schemes can continue to reduce a member’s pension where the member reaches State Pension age, taking into account incremental rises from 6 December 2018?

Question 2: Do you agree that the proposed change provided by draft article 2(3) appropriately updates the definition of ‘relevant state retirement pension rate’?

Respondents’ views

2.3 All the respondents agreed that the proposed changes to the relevant legislation would have the intended effect. There were however some concerns regarding backdating.

(i) Changes in the public interest and resulting from social security legislation

In an argument for retrospective application of the Order, reference was made to a statement made in 2002 by the Solicitor General at that time which stated that:

The government’s policy before introducing a legislative provision having retrospective effect is to balance the conflicting public interests and to consider whether the general public interest in the law not being changed retrospectively may be outweighed by any competing public interest.

It was argued that it is in the public interest to allow trustees to administer pension schemes in accordance with their formal documentation, with the reassurance that they are not unlawfully discriminating against scheme members. Further, because the amendment was required as a result of changes to Social Security legislation, it should be possible to give the Order retrospective effect [see Mercer reply page 2].

(ii) Whether amendments, although achieving what was required, are necessary because of Schedule 1, para 14(1)(a) and 14(1)(c) of the 2010 Order

It was suggested that Schedule 1, paragraph 14(1)(c) of the 2010 Order allows schemes to take account of the increasing State Pension age, whereas under Schedule 1 paragraph 14(1)(a) schemes cannot take account of increasing State Pension age. It was felt that there seemed to be something of a lottery under which schemes could operate integration (14(1)(a) or 14(1)(c)), and respondents questioned the validity of this.

(iii) Objective justification

It was also suggested that backdating might be addressed by putting in place ‘objective justification’ in accordance with sections 13(2) and 19(2)(d) of the Equality Act 2010. Because of this possibility, and to be consistent with article 5(1) of the 2010 Order, it was suggested that statements made in the consultation by the Department for Work and Pensions suggesting that schemes would be at risk of breaching equality requirements were misleading. Because of this, one respondent also suggested that references in the explanatory note to infringement of equality obligations should be removed.

(iv) Other options for addressing backdating

It was suggested that schemes could apply the deduction at the last possible permitted time currently allowed by the legislation – age 65. It was also suggested that government could amend primary legislation to give the changes to the Order retrospective effect, but this would cause the member to be at a loss until their State pension became payable.

Government response

(i) Changes in the public interest and resulting from social security legislation

2.4. The government understands the argument that retrospective application of the changes to the 2010 Order would be in the public interest and that the amendments are simply as a consequence of changes to social security legislation, namely increasing the State Pension age. However, whilst we agree that there is an argument for retrospection, in order for provisions to have retrospective effect the primary legislation under which the secondary legislation was made must contain an expressed provision allowing for retrospective effect.

2.5. The 2010 Order was made under section 61(8) of the Equality Act 2010. As section 61(8) does not contain such provision, the department is unable to legislate with retrospective effect.

(ii) Whether amendments, although achieving what was required, are necessary because of Schedule 1, para 14(1)(a) and 14(1)(c) of the 2010 Order

2.6. The provisions of Schedule 1 paragraph 14(1)(a) and 14(1)(c) of the 2010 Order do work in different ways according to how a pension scheme applies integration. Paragraph 14(1)(c) takes account of schemes which prior to the individual’s State Pension coming into payment pay an additional amount on top of the basic pension. These are often referred to as ‘bridging pensions’. Paragraph 14(1)(a) has a broader application and provides protection where the scheme reduces the pension payable and the scheme design does not pay an ‘additional’ amount. Certain schemes that operate integration but have a scheme design that does not pay a bridging pension would have to rely on this provision rather than paragraph 14(1)(c). This would very much depend on the scheme design.

2.7. It is therefore correct to say that schemes which operate a ‘bridging pension’ prior to the member’s State Pension coming into payment should be able to continue to rely on the exception at paragraph 14(1)(c) of the 2010 Order. However, for schemes which do not pay a ‘bridging pension’, a change to paragraph 14(1)(a) of the 2010 Order is necessary to ensure that they are able to continue to rely on the age-related exception to carry out integration.

(iii) Objective justification

2.8. It was suggested that schemes could rely on section 13(2) or 19(2) of the Equality Act 2010 to continue their practice of integration on account of ‘objective justification’. Sections 13(2) and 19(2) provide that a rule is not discriminatory (direct for section 13 and indirect for section 19) if the rule was proportionate in achieving a legitimate aim. Whilst schemes may wish to rely on this to continue integration, this does not provide certainty and schemes would need to justify to the tribunal or courts that their practice of integration is proportionate and is achieving a legitimate aim. The government has therefore decided that a change to the legislation is the appropriate course of action.

2.9. However, because there will be a period between the date from which the changes to the 2010 Order need to be made and the date from which the changes become effective, schemes may wish to consider taking this approach, for the intervening period.

2.10. Regarding the suggestion that statements relating to a breach of the equality obligations concerning age could be misleading, we do not believe this to be the case. Until the tribunal or courts have decided whether a scheme’s integration practice is proportionate or intends to achieve a legitimate aim, there is a possibility that this could be considered discriminatory. However, we recognise that some schemes may be able to take advantage of Schedule 1, paragraph 14(1)(c) of the 2010 Order and have therefore made some changes to the explanatory note to reflect this.

(iv) Other options for addressing backdating

2.11. As respondents suggested, schemes could apply the adjustment to the member’s pension at the last permitted age (65). This would create a loss for affected members from age 65 until their State Pension became payable, and is therefore something that government would urge schemes to avoid if at all possible.

Impacts from any delay in introducing the changes to legislation

Question 3: We asked if you could you tell us:

(i) Whether you operate a scheme that applies integration.

(ii) If so, if changes are not made to legislation, how many members are likely to be affected?

Question 4: We asked if there is a delay in introducing the changes to legislation, could you tell us:

(i) How many members are likely to be affected within the next (i) 6 months and (ii) 12 months as a result of any delay.

(ii) Are there any ways in which schemes may be able to minimise these impacts?

Respondents’ views and government response

2.13. We are grateful to all those who provided data on numbers likely to be affected by these changes to legislation. This data has helped to inform the Impact Assessment relevant to the 2019 Order.

2.14. The issue of how schemes might seek to minimise the potential impact resulting from any delay in introducing the changes to legislation has been addressed above in relation to questions 1 and 2. In particular, ‘objective justification’ was cited by some respondents as a possible solution.

Annex A: Consultation respondents

Association of Pensions Lawyers
BT Pension Scheme Trustees and British Telecommunications Plc
Mercer
Sackers
Society of Pensions Professionals
Willis Towers Watson

1. Rules 9 and 10 in paragraph 1 of Schedule 1 to the Pensions Act 1995 (c.26). ↩