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Avoiding discrimination | The impact of a rising State Pension age on PHI schemes
Written by Lesley Rennie on 28 February 2024
The existing State Pension age in the UK stands at 66 for both men and women, with a slated gradual increase set to commence from 6 May 2026. More recently, the International Longevity Centre proposed that the UK should raise its State Pension age to 71 by 2050 to ensure a sustainable ratio of workers to retirees.
For companies that secured Permanent Health Insurance (PHI) policies for their workforce when the retirement age was 65, this presents a looming problem, as policies linked to the previous State Pension age could mean that over-65s are cut off from such benefits, which could, in turn, inadvertently open the door to age and/or disability discrimination complaints.
This is an increasingly common issue of late for our clients – so what do employers need to know, and how can they avoid potential disputes and inadvertently falling foul of the law?
What is Permanent Health Insurance?
Permanent Health Insurance (PHI) is an insured benefit that provides income to an individual if they are unable to work due to illness or injury for more than a minimum period. In essence, PHI – also referred to income protection, group income protection, long-term disability (LTD) or salary continuance – acts as a safety net for employees who are unable to work due to health reasons.
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What's the problem?
PHI policies will have a range of eligibility criteria, one of which is typically a maximum age threshold. Once the employee reaches that age, they will no longer be entitled to benefit under the policy.
On the face of it, this could amount to age or disability discrimination, as the insurance cover is inherently linked to age and any cessation of cover will disproportionately impact disabled employees who are most likely to need the cover.
Disability discrimination
From a disability discrimination perspective, potential claims include:
- Direct discrimination – claims that the disabled employee was treated less favourably than a non-disabled comparator, for instance if the policy excludes a particular condition;
- Indirect discrimination – claims that the employer has a provision, criterion or practice (PCP) which is applied across the board but which places employees with a specific protected characteristic at a particular disadvantage;
- Discrimination arising from disability – claims that the employer treats the disabled employee unfavourably due to something arising from their disability; and
- A failure to make reasonable adjustments – claims that the employer has failed to discharge their legal duty to make reasonable adjustments to alleviate any substantial disadvantage faced in the workplace due to the employee’s disability.
Claims of both indirect disability discrimination and discrimination arising from disability can be successfully defended if they are objectively justified, which means that they are a proportionate means of achieving a legitimate aim.
Age discrimination
From an age perspective, claims could include direct or indirect discrimination. It’s worth noting that objective justification can apply to both types of age discrimination complaints. Although in the case of direct age discrimination, the legitimate aim must have a public interest element, which can make it harder to establish.
Focusing on the protected characteristic of age, an insured benefit with a maximum age threshold could amount to unlawful discrimination. The prevalence of PHI schemes was not lost on the drafters of the Equality Act 2010 (“the Act”) and employers can take comfort that there is an exemption contained within Schedule 9 of the Act which provides that it will not be unlawful for an employer to:
- Make arrangements for, or afford access to, the provision of insurance or a related financial service to or in respect of an employee for a period ending when the employee attains whichever is the greater of the age of 65 and the State Pension age; or
- Make arrangements for, or afford access to, the provision of insurance or a related financial service to or in respect of only such employees as have not attained whichever is the greater of the age of 65 and the State Pension age.
Accordingly, if the maximum age threshold under the PHI policy keeps pace with the rising State Pension age, employers will be able to rely upon the above exemption to preclude any claim of age discrimination, although this does not apply where employers self-insure.
The risk arises where the age cut-off doesn’t mirror the increased State Pension age and remains at 65. Where this is the case, the exemption will not apply and the existence and application of any age cut-off will need to be objectively justified.
A PHI policy which is out of step with the increased State Pension age can create problems where an employee is in receipt of the PHI benefits and these come to an abrupt end when they reach the age cut-off. This is where the impact of the cut-off is keenly felt by a disabled employee, as an employee on long-term sickness absence in receipt of PHI will almost certainly, but not automatically, be disabled within the meaning of the Act.
Wait – aren’t the terms of the policy largely dictated by the insurer?
Yes, and employers may wonder how they can manage these risks when they have no control over any age limit set. The good news is that, provided the PHI benefit is expressed in the contract of employment as being conditional upon the terms of the insurance policy, an employer’s liability will be limited to providing access to that policy in line with the applicable terms.
Helpfully, there is case law which established that the insured benefit crystalises at the point at which the employee claims under the PHI scheme as at that point, the employer ceases to provide access to it as the employee has, in fact, accessed it. The terms of the PHI policy freeze at the point of that access. As such, it is those terms and the relevant State Pension age which applied when the employee actually accessed the PHI scheme which determines whether the exemption applies. For those employees in receipt of PHI payments, the exemption will apply to defeat any claim of age discrimination if the maximum age limit was the greater of 65 or the State Pension age at the time when they claimed under the policy.
Where the exemption does not apply, which will be the case for employees who are availing of the benefit after any increase to the State Pension age not reflected in the policy, the provision of a benefit which is subject to a mandatory age cap will amount to age discrimination unless an employer can establish objective justification.
In practice, this can be difficult, with proportionality playing a key part, namely that the discriminatory act was a reasonable and necessary way of fulfilling the employer’s legitimate aim. Employers must consider other means of achieving that aim which would have a lesser discriminatory impact. Shopping around for alternative policies which have a greater age limit will likely be crucial to proportionality.
What can employers do to avoid the pitfall of age discrimination?
Check your current PHI policy
Start by evaluating your current PHI policy to determine whether there is a mandatory age limit and, if so, whether that falls within the exemption. You should also consider the wording of the contract of employment to ensure that this supports the position that you are merely affording access to the PHI benefit with this being contingent upon the relevant insurer’s terms.
It’s also prudent to reserve the right to vary or discontinue the benefit, to express that the entitlement is subject to payments being received by the insurer, and to qualify it as being subject to the premiums remaining at a reasonable level. Should the contractual wording require amendment, this may amount to a contractual variation, which requires consultation and employee agreement.
Consider objective justification
Where the current policy would not afford you the protection of the exemption, consideration should be given to objective justification and whether this could realistically be established. As part of this, you should explore other policies available in the market and, if feasible, consider changing providers to ensure coverage up to the State Pension age. As the State Pension age rises, this should be factored into each annual renewal.
Keep your benefits packages under review
Regularly reassessing and updating benefit packages ensures alignment with evolving legal and demographic trends, fostering an inclusive and fair work environment. By staying proactive and responsive, you can mitigate the risk of age discrimination claims and adapt to the changing needs of your workforce.
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Discrimination and insured benefits are two of the more complicated areas of employment law. As such, organisations should seek advice on specific cases to avoid disputes and legal dilemmas.
If you have a query or concern and would like expert advice and guidance to make sure you don’t fall foul of the law, contact our team today on 0345 226 8393 or request your free consultation using the button below.
