We reported previously on the Coalition Government’s plans to combat age discrimination by abolishing the default retirement age. We report now on some of the detail contained within the consultation document “Phasing out the default retirement age”.

The Government estimates that the removal of the Default Retirement Age will impact upon a number of areas. These are:

  • Employment Tribunal claims
  • Tax revenues
  • Administrative burden on employers
  • Labour supply amongst older employees

Employment Tribunal claims

The consultation document set out how the removal of the right to request procedure should result in fewer Employment Tribunal claims. It was estimated this could be between 200 and 400 fewer claims in 2011. Assuming (as the consultation document does) that an employer’s costs in each case average £6,000, employers could benefit from costs savings of £2.4m.

As well as cost savings for employers, the Exchequer will also benefit as the Tribunals Service should experience a reduction in the costs of administration as well as the operational costs of tribunal hearings. The average cost of an ET application for the Government is estimated at £2,400 for discrimination cases. For the first year the overall saving for Government is estimated to range between £0.5m and £1.0m, with a best estimate of £0.7m.

However, it is not as simple as that.

Even assuming that these reductions in employment tribunal cases are realistic, other sorts of tribunal cases may rise and off-set any savings.

Firstly, any employer that chooses to set their own retirement age will need to objectively justify it. Though we expect most employers to operate without a retirement age, any that do risk the prospect of employees challenging that retirement age in the employment tribunal. These are likely to be the more physically demanding jobs.

Secondly, unfair dismissal cases may increase. Currently employers can retire staff before their competency becomes an issue, so allowing for a ‘graceful’ exit for older employees. With the removal of the DRA, employers will instead have to put their older employees through a formal performance review procedure and ultimately terminate their employment on grounds of poor performance or capability. This will mark a sour end to the employment relationship and lead employers open to tribunal challenges.

Tax revenues

The consultation document estimates that after the first year, nearly £104m extra tax revenue could be generated. This extra money is expected to be generated from the income of those that continue to work and well as increased profits for business through reduced recruitment costs and retaining the skills of experienced workers.

Administrative burden on employers

The current right to request to stay on after 65 is a lengthy procedure. Employers need to send numerous letters and hold meetings and appeals with the employee. The employer is obliged to take requests seriously, although no reason need be given to the employee if the request is turned down.

The consultation document estimates that employers will benefit from costs savings of between £3m and £5.6m.

Labour supply amongst older employees

Concerns have been raised that abolishing the DRA would lead to jobs being held by older employers so that younger ones would be unable to get a foot on the ladder. Data supplied in the consultation document does not support this. The consultation document states that the abolition of the DRA will lead to an increase in the labour supply of approximately 10,000 employees. This amount is relatively small compared to the total labour market and can be absorbed.

Phasing out the Default Retirement Age – consultation document is available from the BIS website. The consultation is open and responses can be submitted on this response form until 21 October 2010.