Update | Pensions: forced retirement policies

The path to compulsory retirement for employers in recent years has been littered with minefields. The default retirement age of 65 introduced by the government in 2006 was challenged in the Heyday case (R (on the application of Age ?UK) v Secretary of State for Business, Innovation and Skills [2009] EWHC 2336 (Admin) but it failed partly because of the government's impending review of the default retirement age.

In 2010, this review took place, not least because of the change in economic circumstances, and the proposals made to phase out the default retirement age were effected in April 2011.

The validity of compulsory retirement has also been played out in other member states, most recently Sweden. The European Court of Justice (ECJ) in Hörnfeldt v Posten Meddelande AB C-141/11was asked to consider whether a compulsory retirement age of 67 in Sweden could be justified.

Mr Hörnfeldt began working for the then Postverket (postal services agency) in 1989. Between 1989 and 2006, Mr Hörnfeldt only worked one day per week. Between 2006 and 2009, he worked 75 per cent of full time.

Under Swedish Law, the state retirement age is 65, however, an employee has the right to remain in his employment until the end of the month in which he reaches the age of 67 without there being a dismissal, commonly referred to as the '67-year rule'.

Mr Hörnfeldt reached 67 on 15 May 2009 and his contract of employment was terminated on the last day of that month pursuant to this rule and as specified in a collective agreement. In relation to pensions, the income an employee receives over the whole of his working career is used as the basis for calculation of the amount of pension at retirement.

Mr Hörnfeldt was concerned that he would have a small pension on compulsory retirement as, although he had on numerous occasions requested to work longer hours, he had in fact worked part-time. It was hoped that by working a few more years, Mr Hörnfeldt could increase his pension sufficiently.

As such, proceedings were issued in the Swedish District Court, where Mr Hörnfeldt sought an annulment of the termination of his employment contract on the ground that the 67-year rule constituted unlawful discrimination based on age.

The Swedish National Courts stayed proceedings and referred the following questions to the ECJ:

1. Can a national rule, like the 67-year rule, give rise to a difference of treatment on grounds of age be legitimate even if it is not possible to determine clearly from the context in which the rule has come into being, or from other information what aim or purpose the rule is intended to serve?

2. Does a national retirement provision such as the 67-year rule, to which there is no exception and which does not take account of factors such as the pension which an individual may ultimately receive, go beyond what is appropriate and necessary in order to achieve the aim pursued?

To answer these questions, the ECJ considered whether the 67-year rule is justified by a legitimate aim and whether the means put in place to achieve that aim are appropriate and necessary.

Pension considerations

The ECJ accepted that although it was not clear what the aim of the 67-year rule is, this does not preclude it from the possibility of being justified. Other elements such as the general context of the measure should be considered. In this case, the preparatory documents relating to the measure mentioned that the 67-year rule seeks, among others, to increase the amount of the future retirement pension by allowing a worker to work after the age of 65 and to counteract the shortage of labour which would result from large numbers of forthcoming retirements.

The ECJ accepted the Swedish government's submissions that the 67-year rule seeks to:

? avoid the termination of employment contracts in situations which are humiliating for workers by reason of their advanced age;

? to enable retirement pension regimes to be adjusted on the basis of the principle that income received over the full course of a career must be taken into account;

? to reduce obstacles for those who wish to work beyond their sixty-fifth birthday;

? to adapt to demographic development and to anticipate the risk of labour shortages;

? to establish a right, and not an obligation to work until the age of 67; and

? to make it easier for young people to enter the labour market (as per the findings of the Swedish Equality Ombudsman).

The ECJ considered that the encouragement of recruitment undoubtedly constitutes a legitimate aim of Members States' social or employment policy, in particular when the promotion of young people to a profession is involved; the 67-year rule was held to be a legitimate aim.

Secondly, the ECJ also held the ?67-year rule to be an appropriate and necessary means to achieve the legitimate aim and that there was no need to take account of the level of the worker's ?pension entitlement.

In deciding the same, the court gave weight to:

? the measure not having the effect of forcing the persons concerned to withdraw definitely from the labour market;

? if the employment contract is terminated, an employer may offer the employee concerned a fixed-term employment contract;

? the pension is made up of an earnings related pension, a premium pension and a supplementary pension;

? the basic pension can be drawn from 65; and

? those workers who have a low pension can receive basic coverage at 65 in the form of a guaranteed pension and/or housing benefit and old age benefit.

The judgment in this case is unsurprising and accords with previous decisions of the ECJ. For example, in Rosenbladt v Oellerking Gebäudereinigungsgesellschaft mbH [2011] IRLR it was decided that member states enjoy a broad discretion to pursue a particular aim in respect of social and employment policy and also in the measures capable of achieving it. Also in Fuchs and another v Land Hessen C-159/10; C-160/10; [2011] IRLR 1043 the ECJ held that national retirement age of 65 in Germany was an appropriate and necessary means of achieving a legitimate aim of encouraging recruitment and promotion of younger workers, striking a balance between younger and older workers.

Most recently, in the case of Seldon v Clarkson Wright and Jakes (a partnership) [2012] UKSC 16 the Supreme Court considered whether a solicitor's firm had a legitimate aim capable of justifying ?the compulsory retirement of a partner at the age of 65. In April 2012, the Supreme Court held that the retention of staff, workforce planning and dignity were social policy objectives as opposed to the individual needs of the firm and thus a legitimate aim for the purposes of justifying compulsory retirement.

Legitimate discrimination

The judgment in Hörnfeldt reaffirms the principles decided upon in the Seldon case but what seems to be emerging is that identifying a legitimate aim for the ?purposes of age discrimination is not quite as onerous as perhaps first thought.

Where the intention of a particular measure is not sufficiently clear, the court can consider the issues contemplated ?prior to the introduction of the measure ?as well as various other indicatory evidence, casting a very wide net for a member ?state to piece together a legitimate aim. However, what is not so straightforward, particularly in the UK, is whether the measure is proportionate.

In this case, the hurdle of proportionality (whether the measure was appropriate and necessary) was surmounted by, among others, the recognition of the broad discretion granted to member states in respect of social and economic policies as established in Rosenbladt.

Conversely, in the Seldon case, the Supreme Court referred the matter back ?to a fresh employment tribunal to ?consider whether the measure (the firm's chosen retirement age of 65) was a proportionate means of achieving the identified legitimate aim.

The employment tribunal's approach to proportionality may be more robust than that of the ECJ. Since the abolition of the default retirement age, the tribunal may scrutinise more closely the particular retirement age chosen by employers, whether the retirement age is applied consistently, and any alternatives to a compulsory retirement age.

An employer considering the introduction of compulsory retirement may not be able to take comfort from the judgment in this case and should consider alternative factors to assess retirement such as capability and performance.

The damaging effect of the ?uncertainty created in this area will ?no doubt be compounded by the ?deepening of the economic crisis as employers are left in limbo as to how to plan for and assess their workforce.

The government needs to consider these developments and take decisive action so that not only the employers but their lawyers can rest easy.