Employers who participate in public sector pension schemes should give proper consideration to whether an employee might be eligible for ill-health retirement under the applicable public sector pension scheme regulations before deciding to dismiss on ill-health capability grounds. Failure to do so may result in the dismissal being unfair.

This insight explains when employers should consider ill-health early retirement before an ill-health capability dismissal, how to make a compliant referral and how Capsticks can support the process.

What is the employer duty?

The duty to consider early ill-health retirement for an employee who might otherwise be dismissed on ill-health capability grounds could form part of the “reasonableness test” for unfair dismissal under section 98(4) of the Employment Rights Act 1996 (ERA). Under the ERA, capability including ill health is a potentially fair reason for dismissal. The question of whether the dismissal is fair or unfair depends on whether in the circumstances (including the size and administrative resources of the employer’s undertaking) the employer acted reasonably in treating it as a sufficient reason for dismissing the employee.

The employment tribunal case of First West Yorkshire Ltd (t/a First Leeds) v Haigh UKEAT/0246/07 [2008] IRLR 182 found that a reasonable employer should give proper consideration to whether an employee might be entitled to the benefits of an ill-health early retirement scheme before it dismisses an employee on long-term sick leave. This case concerned a bus driver whose occupational pension scheme provided enhanced provisions for ill-health retirement on the ground of permanent incapacity. Accordingly, this principle could apply to any employers who participate in occupational pension schemes that offer ill-health early retirement to their employees (which includes all the public sector pension schemes), although each case will be determined on its individual facts.

When does the duty arise?

There is no definitive legal test for when an employer must consider ill-health early retirement. The obligation may arise through the reasonableness assessment for unfair dismissal, the employer’s duties under the Equality Act 2010 and the requirements of the applicable pension scheme.

Under both the ERA and the Equality Act 2010, an employer considering dismissal for ill health capability should ensure that dismissal is the last resort and that alternatives to dismissal are considered. To avoid liability for unfair dismissal and complaints of discrimination arising from a person’s disability and/or failure to make reasonable adjustments, employers should consider ill-health retirement, prior to dismissal, in appropriate cases.

However, deciding when ill-health early retirement needs to be considered is not always easy. An employee’s health does not always deteriorate on a linear basis. Employees may also have complex health needs, the opportunities for redeployment may change during an employee’s sick leave and the employee may express a desire to return to work even when it is clearly contrary to their health and capability.

Further, in determination PO-21599 the Pensions Ombudsman found that an employer in the Local Government Pension Scheme had a duty of care to ensure that it took all reasonable steps to provide support during an employee’s sickness absence and to support an employee in their transition to ill-health retirement in a reasonable timeframe. The Pensions Ombudsman also determined that it would have been reasonable for the employer to have managed the transition so that the complainant’s ill-health retirement pension kicked in once her sick pay ran out.

In making this determination, the Pensions Ombudsman considered Department for Communities and Local Government guidance which states: “In the context of ill health retirements, the role of the employer begins a long time before employment has been terminated and the question of entitlement to an ill-health retirement benefit arises.”

Employers should maintain good engagement with employees who may be entitled to ill-health retirement, and it should be given particular consideration when:

• an employee’s sick pay runs out;
• there is a move to dismiss on ill-health capability grounds; or
• the employer considers it likely that the employee will satisfy the relevant ill-health tests under the applicable pension scheme provisions, if sooner.

The main public sector pension schemes offer different tests of ill-health early retirement from active status (i.e. retirement from employment) than from deferred status (i.e. retirement after the member has been dismissed). Benefits are often more generous when a member in ill-health retires from employment.

If an employer fails to put an employee forward for an ill-health early retirement assessment prior to dismissing them, the employer risks the former employee bringing a complaint in the Employment Tribunal or with the Pensions Ombudsman for the loss of their ill-health early retirement pension, or for the difference in benefits between an ill-health pension from active and deferred status.

Referring an employee for an ill-health early retirement assessment

Referring an employee for an ill-health early retirement assessment is a statutory process set out under the regulations of the applicable public sector pension scheme. It is separate to and distinct from an occupational health assessment, which manages workplace fitness and adjustments.

Occupational Health (OH) will, however, often manage the process of the employee’s referral, collating the necessary medical evidence pack (comprising items such as GP and specialist medical reports and the employee’s job description) for sharing with the medical assessor.

It is therefore important that employers work with their OH teams to ensure a robust ill-health early retirement referral procedure is put in place once it appears that it may be an option.

Employee consent

The initiation process for an ill-health early retirement application whilst the employee is in employment varies across the different public sector pension schemes regulations. The nuances of the ill-health retirement process should be reflected in each employer’s ill-health retirement/sickness management policy which should also, regardless of the wording in the particular scheme’s regulations, start with a conversation with the employee.

It is also a practical necessity that the employee consents to the ill-health retirement assessment because the employee’s medical information (which is sensitive personal data) will need to be shared to enable the assessment to take place. In some cases, the assessor may also need to physically examine the employee or discuss the application with the employee in person.

An employer cannot therefore make a unilateral decision to refer an employee for an ill-health retirement assessment without the employee’s consent, even if they believe it is in the employee’s best interests.

How Capsticks can help

Our market-leading Pensions team has extensive experience advising on all aspects of the public service pension schemes, including the Local Government Pension Scheme (LGPS), the NHS Pension Scheme, and the police and firefighter schemes, among others.

If you would like any support with an incapacity or ill-health early retirement related issue or application, please contact Partner and Head of the Pensions team Kate Beech or Legal Director Sarah Wimsett.