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. It helps ensure compliance and supports adaptation to evolving standards.
Enforcing a retirement age should not only serve as an organisational requirement. It should also operate as a strategic tool that supports long-term workforce health and productivity.
Implementing a retirement age helps older employees transition out of roles where physical or cognitive demands may increase. It promotes the transfer of institutional knowledge and creates space for younger talent. In this way, it contributes to economic dynamism and innovation.
The legal foundation for retirement age enforcement
Section 187(1)(f) of the Labour Relations Act 66 of 1995 (LRA) states that a dismissal is automatically unfair if it is based directly or indirectly on unfair discrimination, including age. However, section 187(2)(b) provides that 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 single, universally applicable retirement age. However, the Pension Funds Act 24 of 1956 references the definition in section 1 of the Income Tax Act 58 of 1962. This section defines ‘normal retirement age’ for occupational retirement funds as the date on which a member becomes entitled to retire.
This entitlement must not be due to sickness, accident, injury or incapacity through infirmity of mind or body.
Mechanisms for implementing the retirement age
There are two primary ways to implement a retirement age in South Africa. The first involves including a retirement age in the employment contract or company policy. This must be agreed to by the employee and is known as the agreed retirement age.
The second method relies on the rules of an occupational retirement fund to which the employee belongs. These rules typically define a normal retirement age when the member becomes eligible for retirement benefits.
The legal position on termination based on retirement age depends on whether an occupational retirement fund exists. It must be read together with the terms of the employment contract.
Legal scenarios and employer options
When no occupational retirement fund applies
The employment contract should clearly state an agreed retirement age. Once the employee reaches this age, the employer generally has three options:
- Terminate the employment relationship on the date the employee reaches the agreed retirement age.
- Permit the employee to continue working under a new fixed-term contract. This contract must define either a specific period or a new agreed retirement age, after which employment will end.
- Allow the employee to continue working beyond the agreed retirement age. If necessary, the employer may then terminate employment based on a fair procedure and a substantively fair reason. These may include misconduct, incapacity, or operational requirements. In this case, the agreed retirement age may no longer be relevant.
This approach aligns with the Constitutional Court’s decision in MISA & Another vs Great South Autobody CC t/a Great South Panelbeaters; Solidarity obo Strydom & Others vs SITA SOC Limited [2024] ZACC 29. While the judgment gives employers flexibility in managing retirement, it does not resolve all ambiguities.
Where an occupational retirement fund applies, but the employment contract lacks an agreed retirement age
In this scenario, the employer must follow the fund’s rules. These rules may allow the employer to:
- Terminate the employment relationship when the employee reaches the normal retirement age as defined by the fund; or
- Retain the employee until a later age, if the fund permits late retirement. Termination must then align with the fund’s rules.
When neither an agreed retirement age nor an occupational retirement fund applies
Here, the employee has no obligation to retire at a specific age. Terminating employment based on age alone may constitute an automatically unfair dismissal under section 187 of the LRA. The employee could then receive compensation of up to 24 months’ remuneration.
In such cases, the employment relationship continues until a fair reason and procedure justify termination, as required by the LRA.
When the retirement age in the employment contract conflicts with the retirement fund rules
Employers may consider the following:
- If the agreed retirement age is earlier than the fund’s normal retirement age, follow the steps outlined in point 1. However, the employee will only qualify for retirement benefits once they reach the fund’s specified age.
- If the fund allows early retirement, the employer may use the fund’s provisions to manage the process.
- If the agreed retirement age is later than the fund’s normal retirement age, the employer may apply point 2. This depends on the fund’s rules.
Key takeaways for employers
To reduce legal risk and support a smooth transition for employees, employers should align the retirement age in contracts with the rules of the applicable occupational retirement fund. This alignment ensures that retirement benefits are payable when employment ends. It also enhances financial security for employees and legal certainty for employers.
Navigating the retirement maze requires employers and retirement funds to collaborate to design retirement provisions that are clear and compliant. These provisions should work in the best interests of both parties. For tailored guidance, our Employment and Employee Benefits team is available to assist.
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