By Robin Simmons, associate, Sacker & Partners, London


Age discrimination - retirement legislation under fire?

One year on, and age discrimination cases have started. The legislation stems from the EU Framework Directive issued in 2000, imposing the requirement to eliminate direct and indirect age discrimination in the workplace. The UK government implemented the directive through the Employment Equality (Age) Regulations 2006, which came into force on 1 October 2006 and were extended to pension provision on 1 December 2006.



Do UK pension schemes 'get out of jail' free?

The regulations include a list of exemptions covering most (but not all) aspects of UK pension provision. For those potentially discriminatory practices not covered by the exemptions, employers and pension scheme trustees can seek to rely on objective justification (which applies equally to direct and indirect discrimination). A similar concept of objective justification can also be used to defend potentially discriminatory practices in the wider employment context.



But objective justification can also apply at national level, and the UK government looks set to have to demonstrate this to defend the UK's default retirement age of 65. That is one of the key messages emerging from the European Court of Justice's (ECJ) ruling last month in the Spanish case of Palacios de la Villa v Cortefiel Servicios SA Case C-411/05.



Why the big fuss about a Spanish case?

The Palacios case is primarily of interest in the UK because the regulations impose a default retirement age of 65. Shortly after the regulations came into force, Heyday, the membership organisation backed by Age Concern, launched a challenge to this, claiming that the UK government has failed to implement the directive properly. The High Court referred a number of questions to the ECJ to determine whether or not the UK legislation complies with the directive. The ECJ is not expected to hear that referral for some time yet (perhaps not until 2009).



Meanwhile, in the Palacios case, the ECJ ruled that national legislation requiring workers to retire at the age of 65 need not fall foul of the directive. Immediate reaction to the judgment suggested that the Heyday challenge was now dead in the water - but arguably the case turned on its particular circumstances, leaving the UK needing to make out its own objective justification case. Had the ECJ followed the line taken by the Advocate-General in Palacios, then Heyday would likely have been fighting a losing battle - that opinion focused principally on recital 14 to the directive, which states that the directive operates 'without prejudice to national provisions laying down retirement ages'.



But the ECJ took a different stance, concluding that recital 14 'does not in any way preclude the application of [the] directive to national measures governing the conditions for termination of employment contracts where the retirement age... has been established'. And so a national measure such as the UK's default retirement age is subject to the requirements of the directive not to discriminate on the grounds of age - unless that discrimination can be objectively justified.



National measures

The Spanish law in question in Palacios allows collective agreements to provide for employment to come to an end when a worker reaches normal retirement age for social security purposes. Mr Palacios was employed under the terms of a collective agreement, under which 'in the interests of promoting employment' he had to retire at 65. Mr Palacios complained that this was age discriminatory.



The Spanish government convinced the ECJ that being able to set a compulsory retirement age was aimed at regulating the Spanish labour market (despite changes in labour market conditions over the years since the legislation was introduced in 1980) - even though the national legislation did not expressly refer to this objective. This national employment policy was, in the ECJ's eyes, a legitimate aim permitted by the directive. But the Palacios decision gives no one-size-fits-all answer to the question of what is a legitimate aim. In the face of the Heyday challenge, the UK government will have to demonstrate the legitimate aim driving its default retirement age.



Second hurdle

Even if there is a legitimate aim, the ECJ makes clear that there is a second hurdle. The measure taken needs to be 'appropriate and necessary' to achieve the aim. In Palacios, the ECJ was satisfied that the Spanish government cleared this hurdle, noting that on reaching the compulsory retirement age, Spanish workers are entitled to a state retirement pension 'the level of which cannot be regarded as unreasonable'. It remains to be seen whether the same can be said about the UK default pension age, given the ongoing political debate about the real value of the basic state pension and the disparity that will appear over time between the default retirement age of 65 and the state pension age.



More helpful perhaps to the UK in defending Heyday's challenge is the ECJ's recognition that the Spanish legislation aims to promote better access to employment by a 'better distribution of work between the generations' - suggesting that member states can apply a balancing approach between the effects of a policy on younger and older workers. However, the ECJ appears to have construed this more narrowly than the Advocate-General, whose opinion spoke quite extensively about the broad discretion national governments should have to find the right balance between differing interests in attaining their objectives in social and employment policy.



Pensions exemptions

As well as providing some hope to Heyday's challenge, Palacios is of general interest to UK pensions lawyers as it gives a flavour of how the ECJ might test future challenges to the pensions exemptions in the regulations. The legislation exempts common UK pension scheme provisions such as: the imposition of a waiting period of up to five years before admission to the scheme; the setting of minimum and maximum entry ages; and the setting of age-related contribution scales (provided the ultimate benefit is broadly the same).



The pensions exemptions are, in effect, objective justifications at a national level - whereby the UK government has enabled a potentially age discriminatory practice or provision to continue without the employer having to satisfy an objective justification test by reference to its particular business. Arguably, a number of the UK exemptions go beyond what is permitted on the face of the directive, making a challenge on the scope of some of the exemptions a distinct possibility. If they were to be the subject of a challenge, we can perhaps expect the ECJ to apply similar principles to those drawn out in Palacios.



Basic message

Overall, the UK government and UK pension schemes might give the Palacios decision a guarded welcome. While the judgment confirms that exemptions in national legislation are acceptable in principle, the basic message is that member states could be tested on the scope of their exemptions on a case-by-case basis.