Intergenerational fairness can justify favourable treatment of retiring employees

When adopting a provision that could be attacked as age discriminatory, employers will need to be clear about the objectives behind the provision in question

Since age discrimination legislation was introduced, many employers have ceased to provide in their incentive plans that employees who retire are treated in effect as 'good leavers' and do not lose their entitlements in light of the risk of a claim of age discrimination from other departing employees. A younger employee who voluntarily leaves the employer by way of resignation and as a consequence loses his or her entitlements may argue that this is adverse treatment in comparison with an older retiree who retains the relevant entitlements.

As the Supreme Court held in Seldon v Clarkson Wright & Jakes, where an employer seeks to justify direct age discrimination, the aims of the measure that is challenged must be “social policy objectives of a public interest nature” as opposed to “purely individual reasons particular to the employer's situation, such as cost reduction or improving competitiveness”.

In Air Products v Cockram the employee forfeited his long-term incentive plan (LTIP) options on leaving at 50. The options lapsed on resignation except in various exceptional situations including retirement – any employee who retired after the age of 55 was permitted to retain any unvested awards. The employer accepted that for a 55-year-old to retain options on retirement whereas the claimant employee lost them on leaving at age 50 constituted less favourable treatment of the claimant because of his age. The employer argued that this was a proportionate means of achieving its legitimate aims of intergenerational consistency and fairness, rewarding experience and loyalty, and ensuring a mix of generations of staff to promote the exchange of experience and new ideas.

The claimant employee participated in a defined benefit pension scheme that had closed to new entrants and that had a retirement age of 50. However, the majority of the employer’s workforce were in the employer’s less favourable defined contribution pension scheme with a pension age of 55. The employer wanted employees in its two pension schemes to be treated consistently on the basis of intergenerational fairness, an argument that the employment tribunal (ET) accepted. To allow those in the defined benefit scheme with a retirement age of 50 to retain their unvested awards rather than 55 would have increased their more favourable treatment compared with the predominantly younger employees who were members of the defined contribution scheme. The ET also accepted that for the retirement provision to incentivise employees to stay until at least age 55 struck a balance between rewarding loyalty and experience and encouraging retention. The ET considered that overall the retirement provision was a proportionate means of achieving the employer’s legitimate aims, even though the financial consequences for an employee who left employment under the age of 55 could be significant.

The Court of Appeal accepted that the ET had been entitled to find that the retirement provisions of the LTIP were a 'legitimate social policy aspect of intergenerational fairness'. It also rejected the argument that the employer needed to cite specific evidence of the retention effect of the retirement provision. That the provision might adversely affect someone only just under the 55 age threshold did not undermine the conclusions of the ET, which had weighed all the relevant factors in the balance. In relation to the attack mounted on the loyalty justification for the retirement provision – that it did not encourage loyalty when it favoured a 54-year-old with 30 years’ service in comparison with a 55-year -old with seven years’ service – the Court of Appeal considered that this was only a minor component of the ET decision, which it upheld.

While this decision demonstrates that favourable treatment of retirees can be justified, and employers will no doubt take particular note of the specific legitimate aims successfully relied upon in this case, each case depends on its facts. When adopting a provision that could be attacked as age discriminatory, employers will need to be clear about the objectives behind the provision in question, potentially to document them, and be ready (if challenged) to justify the provision not only on commercial grounds but also in social policy terms.

Charles Wynn-Evans is a partner at Dechert