The perils of rushing redundancies to avoid pension costs: lessons learned

Facts

Mr Cook was head of compliance with the Gentoo Group Limited and a long-serving employee. Gentoo is a housing association with over 60,000 homes. In October 2017, the Homes and Communities Agency downgraded the group’s regulatory rating for governance to non-compliant. In April 2019, the group decided to restructure. Slides from the executive team meeting in April 2019 showed Mr Cook’s role as deleted from the structure.

On 2 May 2019, a decision was made at the appointments and remuneration committee to forgo the usual board approval on this structural change (the next board meeting was 22 May 2019) and speedily take Mr Cook through a redundancy process to be completed before his 55^th birthday on 11 August 2019. Mr Cook was dismissed without notice, by reason of redundancy, on 16 May 2019 following a series of hastily arranged consultation meetings. He did not attend any of them as he was signed off sick. 

The reason for this haste was that, when Mr Cook celebrated his 55^th birthday, he also celebrated his entitlement to an immediate pension from the Local Government Pension Scheme (LGPS) if made redundant. Under the LGPS, when a member reaches 55 years and is either made redundant or their contract terminated on grounds of business efficiency, they are entitled to (and required to take) immediate payment of their pension. Gentoo wanted to avoid this as it would require it to make an £80,000 payment into the LGPS. Mr Cook bought claims for unfair dismissal and age discrimination to an employment tribunal. 

Tribunal decision

The tribunal found that the redundancy process was not fair; no attempt had been made to find suitable alternative roles and had there been a fair process it was likely that Mr Cook would have still been made redundant but not until after his 55^th birthday. However, the tribunal found that there was no age discrimination. The comparators that Mr Cook identified were inappropriate and, in any event, the discrimination could have been justified as proportionate means of achieving a legitimate aim (direct age discrimination is the only direct discrimination that can be objectively justified). Mr Cook appealed to the Employment Appeal Tribunal (EAT).

EAT decision

In the absence of the tribunal’s detailed reasons as to why the discrimination was justified, the EAT agreed that Gentoo could request the tribunal’s reasoning. This reasoning could then be considered by the EAT when deciding on the appeal against the dismissal of the direct discrimination claim. 

The tribunal confirmed that the legitimate aim was saving costs which would have been incurred in making the additional payment to the pension fund plus the prior disapproval of the regulator as to the practice of windfall pension enhancements. The tribunal said that the speedy dismissal was a proportionate means of achieving this aim because Mr Cook would have received more than £47,000 in redundancy and notice pay and also had access to another pension from which he could have taken an income. This meant that, although one party was going to be disadvantaged whichever way the decision went, when balancing up these disadvantages, it was appropriate to decide in favour of Gentoo.

The EAT decided that the legitimate aim identified by the tribunal was acceptable. However, the EAT found that the tribunal’s thinking on whether the speedy dismissal was a proportionate means of achieving this aim was not sufficiently well thought through to justify their decision. 

That said, the EAT did not substitute a finding of discrimination, instead, it sent the decision back to a newly constituted tribunal to consider this point again. That decision is still awaited.

What can we learn?

• Be aware of early retirement rights on redundancy or on a business efficiency termination in the LGPS – you could be in for a nasty shock due to a hefty additional contribution.
• The Regulator of Social Housing (RSH) has consistently highlighted the risks arising from membership of defined benefit pension schemes and expects these risks to be carefully managed; failure to do so could lead to the RSH asking some awkward questions and possibly a regulatory downgrade.
• A generous redundancy and notice package cannot offset or replace early retirement rights in the LGPS or the associated costs of these rights. These costs must form part of any business plan to exit employees who are at or nearing the age where the right to early access to pension is reached.
• Rushing through any dismissal is ill-advised and even more so when discrimination is a potential claim.
• Whilst age discrimination can be justified, any justification that argues that it will cost you more not to discriminate will not be successful unless it is accompanied by a further justification that is not about cost.
• Justification arguments are carefully scrutinised by tribunals and the guidance and case law is complex. We would advise seeking specific employment and pensions advice should you want to run a justification defence.
• An employer who seeks to rush through a process to deny a longstanding employee benefits due on redundancy is unlikely to create a culture of mutual respect and trust with its staff. In an already competitive marketplace for staff, the impact of this on recruitment and retention and the associated costs will need to be carefully weighed by the employer.

For more information about redundancies and the LGPS, please contact Doug Mullen.

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