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Succession planning in light of the outlawing of age discrimination

29 Jun 2010

Partnerships now face a number of problems as part of succession planning when retiring partners, or when casting off under-performing partners or when controlling the number of partners holding an equity stake.

As a result of the Employment Equality (Age) Regulations 2006, it is now potentially unlawful to retire a partner.  The Regulations introduced a statutory retirement age of 65 but this applies to employees and not partners.  As a result, a partnership must be prepared to “objectively justify” any retirement by reference to age.  The Tribunals have shown that compulsory retirement can be “objectively justified” but there are hurdles to overcome.  One cannot simply assert this: it must be proved.

What guidelines can be observed about retirement?

Case Study A

In this case, a partnership deed provided that partners would retire at the age of 65.  A partner was retired at 65 against his wishes and he brought a claim alleging age discrimination without justification.

The Tribunal decided there was age discrimination but the retirement, based on evidence put forward by the remaining partners, could be “objectively justified”.  The Tribunal considered the following factors to be crucial:

  • the retirement age applied to all the firm’s partners;
  • the partner in question had made no attempt to change the compulsory retirement age; and 
  • the partnership needed to be able to offer advancement to partnership to its other employees. 

Case Study B

In this recent high profile Tribunal case, a partner brought a claim for age discrimination and claimed that he had in effect been forced to retire early due to changes to his firm’s pension scheme.  The partnership said they had made changes as younger partners were contributing much more than older partners had previously contributed and an increasing proportion of the profits of the younger partners were being used to pay for retired partners’ pensions.

The aggrieved partner retired with the partnership’s consent at the age of 54.  Had he remained at the firm until he was 55 (the firm’s retirement age), he would have suffered a 35% loss in his pension benefits due to the changes to the pension scheme.  The partner argued that he had been effectively forced to retire early because it would have been “economic madness” for him to stay at the firm until he was 55 and suffer the loss in his pension benefits.

Again the Tribunal agreed that the ex-partner had been discriminated against due to his age, but decided again that the treatment could be “objectively justified” because the firm’s aim was to reduce the effect of:

“intergenerational unfairness where by younger partners would contribute more and more as active partners against the prospect of receiving a smaller and smaller pension themselves when they came to retire”.  

Of relevance were the facts that:

  • full consultation had been entered into with all partners regarding the changes to the pension scheme; and
  • expert advice had been taken in respect of the changes that were going to be made.

Is Age Discrimination an Empty Gun?

Although partnerships may breathe a sigh of relief in light of these two cases, the cases do still illustrate that retiring a partner on the grounds of his or her age can be age discrimination and every case will turn on its own particular facts.  The aims of any age related measures will be tested to ensure they can be objectively justified.

A good example of this is a case involving the compulsory retirement of a judge. The tribunal decided that his retirement had not been “objectively justified” by his employer. The tribunal rejected the employer’s argument that it was necessary to retire judges at the age of 65:

“in order to create vacancies for new blood to enter the judiciary” and to provide “sufficient experience” to younger judges.

The tribunal found that many vacancies were created each year by judges being promoted and there were other ways to introduce new blood, such as adjusting the court’s timetables. The Ministry of Justice’s argument was also undermined as it planned to reduce the number of judges by 10 per cent over a 15-year period.

What factors must be considered when deciding on retirement?

Although each case does depend upon its own facts, the tribunals hearing these cases have given an indication of factors that will be taken into account when deciding if forced retirement can be justified.  These include:

  • does the retirement age apply to all partners?
  • have any partners objected to the retirement age?
  • has consultation been entered into in respect of the retirement age?
  • does the partnership in question genuinely need to retire its partners compulsorily to assist the advancement of other employees?
  • is there any other way that the partnership can achieve its overall aim, i.e.  assisting the advancement of other employees, whereby it avoids forcing partners to retire? 

What other steps should be taken?

As the action of retiring a partner has to be “objectively justified”, it is advisable that firms take advice before forcing partners to retire. Firms should also begin  tackling performance issues head-on as they can no longer rely on simple compulsory retirement to force out under-performing partners.  Firms must start to pro-actively manage their partners as they would employees by setting targets and designing appraisal systems.  It should be made clear to partners exactly what the assessment criteria is, how and by whom they are being monitored and assessed and importantly, how their performance compares with peers within their firm. It is essential that firms now invest the time and energy to get performance management right.

If you would like further information please contact Neil Dwyer or Sarah Hall at Hay & Kilner Solicitors on 0191 232 8345 or email: sarah.hall@hay-kilner.co.uk

Please note:
This article is not legal advice; it is intended to provide information of general interest about current legal issues. Please contact us to discuss how the contents of the article may affect you.