"Principles for compensating pension loss" in the ET now published

Following the withdrawal of the 2003 edition of ‘Compensation for Loss of Pension Rights: Employment Tribunals’, a working party of Employment Judges was set up to provide guidelines for the calculation of pension loss. These guidelines have just been published and are called “Principles for compensating pension loss".

You can find The Presidential Guidance on Pension Loss here, the Principles for Compensating Pension Loss here and The Response to the Consultation on Compensation for Loss of Pension Rights can be found here. An editable version of the Agenda for Case Management (England & Wales), with a new section 3.5 which asks specifically about pensions, can be downloaded here.

The Principles are not mandatory but it is expected that Tribunals should use them.

The following summary explains the main points in the guidance, including the 'seven steps model'.

Defined contribution (DC or money purchase) schemes
Pension loss will be the loss of employer contributions for a period of time the ET determines is appropriate. The contributions method, as the guidance emphasises, does not compensate for the loss of the employer's contributions themselves; instead, it is the mechanism by which the loss of pension income in retirement, after deduction of tax, is assessed.

Defined benefit (DB or final salary) schemes
There are two methods of calculation depending on the complexity of the case.

*Simple cases (including cases where a Polkey type terminal date for loss of benefits is appropriate or where the value of the loss is academic because the compensation cap will apply).
Method of calculation
As with DC schemes, pension loss will be the loss of employer contributions for a period of time the ET determines is appropriate.

Complex cases (typically career long loss cases, or where the losses are significant and the compensation cap does not apply).

Case management
Cases which could be described as complex should be identified at an early stage and parties should include a pension loss element on the schedule of loss at the start of the process i.e. before any liability is found. Use of expressions such as "to be confirmed" will be discouraged.

For complex cases, there will be a split liability and remedy hearing, the remedy hearing being in two stages:

1. The first stage will make findings of fact and identify the non-pension losses.
2. The second stage will identify the pension loss, either by using Ogden tables or by expert actuarial evidence.

There could be two types of loss that are to be considered: loss of annual pension and loss of a lump sum.

The Ogden Tables provide multipliers which are applied to the multiplicand for calculating loss of earnings and pension loss for different categories of people.

Essentially, the multiplier is the number of years for which the loss will be incurred and will depend on the sex, age at EDT and retirement age of the claimant and the current rate of return. The multipliers have been calculated with reference to 2008 mortality rates for the population at large – these rates are not the same as for the population in DB schemes. A two year mortality adjustment to both age and date of retirement will therefore need to be applied (see below).

The multiplicand is the present day value of the future loss of annual pension.

For the purposes of pension loss in employment we are concerned only with tables 15 to 26 (for annual pension loss) and table 27 (for pension lump sums).

*Method of calculation loss of annual pension using Ogden tables
*The guidance provides a 'seven step model as follows:

Step 1: Identify what the claimant's net pension income would have been at their retirement age if the dismissal had not occurred.

Step 2: Identify what the claimant's net pension income will be at their retirement age in the light of their dismissal.

Step 3: Deduct the result of Step 2 from the result of Step 1, which produces a figure for net annual loss of pension benefits.

Step 4: Identify the period over which that net annual loss is to be awarded, using the Ogden Tables to identify the multiplier.

Step 5: Multiply the multiplicand by the multiplier, which produces the present capital value of that loss.

Step 6: Check the lump sum position and perform a separate calculation if required (see below).

Step 7: Taking account of the other sums awarded by the tribunal, gross up the compensation awarded.

Lump sums
At retirement, claimants could receive either (i) a commuted lump sum (i.e a lump sum in return for sacrificing some of their annual pension) or (ii) a non-commuted lump sum (i.e. one where no annual pension is sacrificed). In most cases lump sum calculations can safely be ignored. This is because most DB schemes in the public sector (whether using a final salary or CARE design) only provide for a lump sum through commutation of part of the pension income. In such cases, the loss can adequately be assessed using the pension income in the presumed absence of commutation.

In this case the difference between the lump sum received now and the lump sum that would have been received at retirement had the claimant not been dismissed will need to be identified. It may be appropriate to apply a discount factor, using Ogden Table 27, to any lost non-commuted lump sum to reflect the fact that it is being received early.

There are numerous worked examples in the appendix which illustrate the different scenarios that might occur. They are particularly helpful in identifying the correct multipliers and how to gross up the amount to account for tax.

Published: 10/08/2017 16:39

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