Discrimination – where are we now?

This article looks at the current state of play on discrimination law and its impact on pensions.

Lower Earnings Limit (LEL) Off-set – Shillcock

In Shillcock a part-time employee was effectively excluded from her employer's pension scheme because she earned less than the LEL and the scheme only provided benefits on earnings above the LEL. The Pensions Ombudsman considered that this amounted to indirect sex discrimination because significantly more women were excluded from the scheme than men and the policy could not, in his view, be objectively justified. He directed that the employee be retrospectively admitted to the scheme and provided with pension accrual that did not discriminate because of her low earnings, conditional upon her paying retrospective employee contributions.

The case was appealed. In allowing the appeal (on 19 April 2002), the judge considered that the off-set was intended to achieve broad integration between state and scheme benefits and applied to all employees. As all employees could accrue a state pension on earnings up to the LEL by payment of Class 3 National Insurance contributions, the fact that the off-set applied irrespective of whether employees chose to do so did not render the policy discriminatory. There was therefore no unlawful discrimination.

Retrospective rights for part-timers

Following Preston on back-dated pensions for part-timers, many employers have had to consider the practical aspects of collecting arrears of employee contributions. The tax aspects were summarised on 23 April 2002 in the Revenue's Pension Update No. 131 which provides that such employee contributions may be made as a single contribution, or as ongoing contributions. However, income tax relief is limited to 15% of remuneration in the tax year in which the contribution is made. Tax relief is not available on the excess over 15%.

An employee could offer to make any back payments by instalments to keep the amount paid in any one year within the 15% limit. An employee who has left the relevant employment, can make contributions to their former scheme but will not get tax relief.

GMP Equalisation

GMPs accrued between 1978 and 1997 and were intended to be a substitute for State Earnings Related Pension Scheme (SERPS) benefits which are paid at different state pension ages for men and women. The question of whether this amounts to sex discrimination was considered by the Pensions Ombudsman in Williamson where he directed that GMPs should be equalised.

In February 2001, the High Court overturned the determination because the Ombudsman did not have jurisdiction to direct trustees to equalise the GMPs of all scheme members, as none of the other members were represented or given a chance to comment. The courts therefore made no ruling on the GMP equalisation issue.

Under provisions in the Child Support Pensions and Social Security Act 2000 (which have yet to come into force) the Ombudsman will have the power to make directions impacting on scheme members as a whole provided that different classes are represented. We understand that there are currently further GMP equalisation cases before the Ombudsman awaiting this legislation so there will be further developments on this issue.

Fixed Term Employees

The UK had until 10 July 2002 to comply with the Fixed Term Workers Directive. However, the DTI has just announced that the legislation will not be in place until October 2002. Although the Government has said that in their view the Directive does not cover pay (and therefore pensions) they have so far chosen to do so in the draft legislation. The Employment Bill contains provisions which will enable regulations to cover pay and pensions and the draft regulations provide that:

"A fixed-term employee has the right not to be treated by his employer less favourably than the employer treats a comparable permanent employee:

(a) as regards the terms of his contract; or

(b) by being subjected to any other detriment by any act, or deliberate failure to act, of his employer".

However, different treatment can be justified on objective grounds or if the terms of the employee's contract, taken as a whole, are at least as favourable as the terms of a comparable permanent employee's contract.

Equal Treatment Directive

The Equal Treatment Directive prohibits direct or indirect discrimination based on religion or belief, disability, sexual orientation or age. Member states generally have until 2 December 2003 to implement this Directive, with 3 more years to implement the provisions in relation to age and disability. In December 2001 the Government issued a consultation paper looking at these issues.

In relation to age, the consultation paper says that the "new legislation will not affect the operation of occupational pension schemes. Article 6(2) of the Employment Directive makes it clear that fixing ages of admission for such schemes and, in this context, the use of age criteria in actuarial calculations should not be regarded as age discrimination". This is not entirely correct, as there may be consequences for occupational pension schemes in relation to things such as age related accrual. However, it is worth noting that the Directive allows for the possibility of an objective justification defence.

In relation to sexual orientation, this is relevant in relation to death benefits. The consultation paper provides that where:

"rules of the scheme… restrict benefits to opposite sex partners…, this is likely to amount to direct discrimination and, therefore, will be incompatible with the Directive. However, where the rules of the scheme restrict benefits to surviving spouses, this is allowable under the Directive. This is because the Directive is expressed to be ‘without prejudice to national laws on marital status and the benefits dependent thereon'".

In relation to disability, the UK already has legislation prohibiting discrimination (the Disability Discrimination Act 1995). However, some changes will need to be made to the existing regime. In particular it is proposed that the existing exemption for employers with fewer than 15 employees should end in October 2004. In addition, legislation currently allows employers and trustees of pension schemes, to prevent a disabled person from having access to particular benefits if the cost of providing them would be substantially greater than for a non-disabled person. The consultation paper invited views on whether, where a disabled person would be substantially disadvantaged, employers and trustees should be required to make adjustments to the scheme or to objectively justify the discrimination by showing that it has a legitimate aim and that the means of achieving that aim are appropriate and necessary.

For further information on this issues, please contact Nigel Moore at [email protected] or on +44 (0)20 7367 3405.