How to implement retirement age policies in South Africa

In the dynamic landscape of workforce management, the concept of retirement age holds both rational and practical importance. For employers, understanding the legal framework is crucial for ensuring compliance and adapting to evolving standards. This article outlines the current legal position and offers practical insights for aligning employment contracts with retirement funds in which employers participate (occupational retirement funds).

The enforcement of a retirement age should not only serve as an organisational requirement but also as a strategic tool to ensure long-term workforce health and productivity. Implementing a retirement age facilitates the transition of older employees out of roles where physical or cognitive demands may increase, promotes the transfer of institutional knowledge, and creates space for younger talent. As such, it is integral to economic dynamism and innovation.

Section 187(1)(f) of the Labour Relations Act 66 of 1995 (LRA) states that a dismissal is automatically unfair if it is directly or indirectly based on unfair discrimination on any arbitrary ground, including age. However, section 187(2)(b) provides that a dismissal based on age may be fair if the employee has reached the normal or agreed retirement age.

South African labour legislation does not prescribe a universally applicable retirement age. However, the Pension Funds Act 24 of 1956 provides that 'normal retirement age' has the meaning assigned in section 1 of the Income Tax Act 58 of 1962, which provides that the 'normal retirement age' means, for purposes of occupational retirement funds, "the date on which the member becomes entitled to retire from employment for reasons other than sickness, accident, injury or incapacity through infirmity of mind or body".

There are generally two primary mechanisms for implementing a retirement age in South Africa. The first is through an employment contract or company policy that explicitly stipulates a retirement age agreed to by the employee (agreed retirement age). The second is via the rules of an occupational retirement fund of which the employee is a member (normal retirement age). These rules typically specify a normal retirement age at which the member becomes eligible for retirement benefits. Accordingly, the legal position regarding termination of employment based on retirement age varies depending on the existence of an occupational retirement fund, read together with the terms of the employment contract.

The current position can be summarised as follows

1. When no occupational retirement fund applies: The employment contract should stipulate an agreed retirement age. In such cases, the employer generally has three options once the employee reaches this age:

• terminate the employment relationship on the day the employee reaches the agreed retirement age;
• permit the employee to continue working beyond the agreed retirement age under a new fixed-term contract, which sets out either a defined period or a new agreed retirement age after which the employment will terminate; or
• allow continued employment beyond the agreed retirement age, and if necessary, terminate employment in accordance with the LRA based on fair procedure and a substantively fair reason such as misconduct, incapacity, or operational requirements. In such cases, the retirement age may become irrelevant.

This approach reflects the Constitutional Court's three-way split decision in MISA & Another v Great South Autobody CC t/a Great South Panelbeaters; Solidarity obo Strydom & Others v SITA SOC Limited [2024] ZACC 29. While this judgment provides employers with options for managing retirement, it does not offer comprehensive clarity on the issue.

1. Where an occupational retirement fund applies, but there is no agreed retirement age in the employment contract: The employer must observe and comply with the rules of the fund. These may allow the employer to:

• terminate the employment relationship when the employee reaches the normal retirement age as defined in the fund rules; or
• if the fund provides for a late retirement age, the employer may consider retaining the employee until that later retirement age, after which their employment may be terminated in accordance with the occupational retirement fund's rules.
• Where neither an agreed retirement age nor an occupational retirement fund applies: In this case, the employee is not obliged to retire at a specific age, and termination of employment based on age alone may constitute an automatically unfair dismissal under section 187 of the LRA. This may result in an award of compensation of up to 24 months' remuneration. Where the employment relationship is not terminated for another reason (other than age), the employment relationship will continue indefinitely until it is terminated for a fair reason and in line with a fair procedure under the LRA.

Where there are conflicting retirement ages between an employment contract and an occupational retirement fund: The employer may consider the following:

• if the agreed retirement age is earlier than the fund’s normal retirement age, the employer may apply the steps set out in point 1. However, the employee will only become eligible for retirement benefits once they reach the retirement age specified in the fund rules;
• if the fund permits early retirement, the employer may invoke the relevant provisions of the fund rules; or
• if the agreed retirement age is later than the normal retirement age in the fund rules, the employer may, depending on the rules of the relevant fund, follow the steps in point 2.

Key takeaways for employers

To avoid legal risks and ensure smooth transitions for retiring employees, employers should align the retirement age in employment contracts with the retirement age in the rules of the applicable occupational retirement fund. This ensures that retirement benefits are payable when employment ceases, offering financial security for employees and legal certainty for employers.

Employers and retirement funds are encouraged to collaborate in designing clear and compliant retirement provisions that benefit both parties.

* Van Vuuren is a partner and Leahy is a candidate attorney from Webber Wentzel.

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