Pension and pension loss
Employment law- pensions and pensions loss
What is a pension?
A pension is a source of income a person receives once they have retired from work [2.2 p15]. There are three main pension types:
- State pension – income paid by the state to a citizen, individuals qualify for this by having paid sufficient National Insurance contributions throughout their life;
- Personal pension – individuals pay money into a pension scheme for themselves;
- Occupational pension – sometimes referred to as a workplace pension, a form of deferred pay that an employer provides for their employees.
What is pension loss?
One result of an unlawful dismissal (whether wrongful dismissal, unfair dismissal or a dismissal based on discrimination , may be that you will receive a smaller pension upon retirement than if you hadn’t been dismissed. Employment tribunals aim to rectify this, ensuring you end up in the same financial position had the dismissal not occurred – this is known as the “Gourley” principle.
Tribunals will consider both the potential loss of state pension rights and that of occupational pension rights. Personal pensions, however, are usually independent of employment and therefore tend not to be considered by tribunals. When considering your losses, the tribunal will take into consideration your intended date of retirement – requiring somewhat ambiguous guesswork as to what age, if it wasn’t for the dismissal, the claimant would have retired.
Awards for pension loss, as with other forms of past or future pay, are based on net pay – the remains of the original pay after income tax has been removed.
Why is pension loss a complex issue for Employment Tribunals?
It is often found that, when making a claim, individuals often do not seek compensation for pension loss, even if they may be entitled to it. Frequently, it is those without legal representation who fail to make these claims. However, even when pension loss is raised, it is often done so in vague terms, making it difficult for a tribunal to come to an appropriate decision.
State pension cases
The impact that an unlawful dismissal may have on an individual’s state pension is that it interrupts their National Insurance payment record. The requirements for the New State Pension (introduced April 2016) state that an individual must have paid National Insurance for thirty-five years to qualify for the full pension. In some cases, a dismissal may mean you fail to qualify. In such cases the tribunals must attempt to work out a sum that will cover the losses encountered. This is often a difficult task as requires the tribunals to invoke a lot of guesswork, for example it is impossible to know by how much the New State Pension weekly value will rise each year.
Occupational pension cases
Occupational pensions can generally be split into two categories:
- Defined Contribution (‘DC’) schemes – the employer and employee both contribute defined amounts to the fund as percentages of salary
- Defined Benefit (‘DB’) schemes – pensions based on your salary and how long you’ve worked for your employer – these are costly for employers and have been scaled back significantly in recent years
A simple occupational pension case for an employment tribunal, whether it be a DC or DB case, generally use the ‘contributions method’. This usually involves the use of an advisory table known as the ‘Ogden tables’ which makes it easier for tribunals to calculate the future pension loss. However, there are some more complex cases, for example if a dismissal results in an individual never working again (known as a career loss case), this may require a more specific method of calculating pension loss].
The Ogden Tables follow a seven-step model by which tribunals can ascertain an appropriate compensatory sum, which are set out below:
1. Identify what the claimant’s pension would have been upon retirement if the dismissal had not occurred.
2. Identify what the claimant’s pension will be as a result of their dismissal.
3. Deduct the result of Step 2 from the result of Step 1 – this sum will be the net annual loss of pension benefits.
4. Identify the time that the net annual lost will affect the claimant, using the Ogden Tables to find the multiplier.
5. Multiply this period by the multiplier found in the Ogden Tables – produces the current value of pension loss.
6. If the claimant has a pension scheme that provided for a separate lump sum, then another calculation is required, however this is rare.
7. Calculate the full compensation award, taking into account any other sums granted by the tribunal.
Although the Ogden Tables are the recommended method for working out pension loss compensation, some parties choose to employ an expert to calculate the losses – which is a much more expensive option.
Although it is recognised that the value found by the Ogden Tables will be imprecise, it is believed (by the guidance published jointly by the President of Employment Tribunals for England and Wales, and the President of Employment Tribunals for Scotland) that the figure will represent a fair assessment of losses.