A new proposed directive from the EU is, in my view, potentially much more important for pension schemes than the pensions directive itself.
The directive on establishing a General Framework for Equal Treatment in Employment and Occupation could have far reaching implications for pension scheme design across the EU. This directive was adopted by the Council of Ministers on 27 November 2000 to put into effect in member states the principle of equal treatment, regardless of religion, belief, disability, age or sexual orientation, in relation to access to employment and occupation (including promotion, vocational training, employment conditions and membership of organisations). This applies to all persons in both public and private sectors including public authorities and paid or voluntary work.
The directive clearly contains within its scope occupational retirement schemes within the broader definition of employment conditions since “pay” is explicitly mentioned as falling under the directive and the provisions of such schemes will need to abide by the directive when passed. “State social or social protection schemes” are, however, excluded.
Perhaps the key relevant points for consideration in the context of occupational benefit plans are in respect of age and sexual orientation. Anti-discrimination on disability grounds could also be an issue, particularly as to when employment actually terminates, and under which conditions, in respect to disability.
The principle of equal treatment in the directive states that neither direct or indirect discrimination can take place between persons on whatever grounds. The directive envisages that these provisions/practices etc may in certain circumstances be justified by a legitimate aim, for example where a maximum age limit applies due to the training needed to perform a particular occupation.
A key point in respect of the legislation is that, unlike, the legislation in the US for instance, age discrimination can apply to both older and younger workers. In the US the primary aim of the legislation is to protect older workers against discrimination, and thus provision of additional benefits for older employees would necessarily lead to a breach of the law. However, in the EU legislation age discrimination is a two-edged sword. Provisions, which unfairly favour older workers, could be rejected on the grounds of discriminating against younger workers.
Some examples of cases where typical current practice could potentially become outlawed by such legislation are age-related defined contribution scales in the Netherlands, or favourable early retirement provisions in the UK for instance.
The directive excludes from its scope some areas in relation to age discrimination. In particular, the fixing of minimum conditions of age for “access to employment or to certain advantages linked to employment” is specifically allowed. This could be interpreted as allowing minimum ages for joining a scheme and/or for entitlement to benefit (eg on early retirement). However, the ability to pay a different level of benefit is not specifically exempted (eg an enhanced early retirement benefit).
These particular exclusions are examples given in the directive of a blanket provision which allows for age discrimination where this can be justified by a legitimate aim “including legitimate employment policy, labour market and vocational training objectives and if the means to employ it are appropriate and necessary”. However, the vague nature of this portion of the text is likely to lead to a raft of test cases on the interpretation of the words “legitimate … employment policy … labour market … appropriate and necessary.”
One key area of debate is likely to be the impact of any legislation on the future of defined benefit schemes. The cost and value of such schemes rises with age and thus is discriminatory in terms of age. There is a very badly-drafted clause in the directive which was presumably meant to exempt defined benefit schemes from accusations of age discrimination. I have yet to find any actuary or commentator who can provide any assurance that the clause will be interpreted in this fashion.

The exemption clause appears to allow the use of age-related factors (for instance providing a higher lump sum according to the age of the individual), but it does not appear to exempt any schemes from providing benefits of higher levels to one age group as opposed to another. It also appears to imply that actuarial factors should be unisex.
Whilst the provisions above relating to age discrimination lie primarily in the areas of direct discrimination, as regards sexual orientation discrimination, this is most likely to be indirect in nature. An example of potential discrimination in this area could be in France where occupational plans provide risk benefits that discriminate according to family status, providing higher benefits to employees with children. This could be considered indirect discrimination against homosexual employees who are less likely to have children. The same could apply to schemes that provide orphan’s pensions in Ireland for instance. There are also likely to be issues with benefits provided to spouse’s but not same sex partners.
So where are we in the process of putting in place this wide-ranging legislation? The answer is surprisingly far. As stated above the directive was formally adopted on 27 November 2000. According to the directive, the laws, regulations and administrative provisions that are necessary for the implementation of the directive must be adopted by the member states by 2 December 2003. However, there is provision for member states to seek a three years from 2 December 2003 to implement the key provisions of the directive on age and disability discrimination.
It is worth considering some of the detailed provisions of the directive. The directive states that member states must ensure that judicial and administrative procedures are available to all persons who feel that the principle of equal treatment has not been applied. Member states are also obliged to allow legitimately interested associationsorganisations (or other legal entities) to engage on behalf of the complainant in judicial or administrative procedures. Thus, for a European multinational, there is a clear risk of action initiated by unions. The European works council may well be the first forum in which this issue is debated.
Member states must also work with their national judicial systems to ensure that where a case comes before a court (or other competent authority) it is for the respondent to prove that no form of discrimination has taken place. Importantly, member states are also obliged to abolish or amend any laws, regulations and administrative provisions or provisions within individual/collective contracts/agreements that are contrary to the principle of equal treatment.
States must also lay down the rules for the penalties applicable for breaches of the principle of equal treatment and ensure that penalties are implemented. Thus there is a battery of weapons available for potential claimants under this legislation and a number of requirements for governments to act relatively speedily.
For multinationals, and indeed any companies in the EU, the directive will have a wide impact on a number of areas of employment practice and there is a great risk of reduced plan design flexibility for employers.
Consider the following example of an age-related defined contribution plan. Is it really possible to argue that it is legitimate that a blue collar worker aged 26 receive perhaps 10% less pension contributions from the employer, ie 10% less pay, compared a worker doing exactly the same job aged 64? Perhaps more worryingly, if that argument is accepted, then what protections are there for the future of defined benefit plans which also provide more costly benefits to the older employee?
Paul Kelly is a European partner with William M Mercer in London

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