Pension loss on termination of employment


Bath PublishingBath Publishing have published the 2018/19 edition of the Employment Tribunal Remedies Handbook (General editor Benjamin Gray of Littleton Chambers) so we thought it would be useful to include one of the entries on Zero hours contracts to give you a flavour of what the book contains. We are offering all readers 10% off the usual price of £45. You can buy your copy from bathpublishing.com/employment – make sure you enter the discount code DB301610 when prompted.

(see also Ogden Table 27; Table 28; Table 29)

Following the withdrawal of the 2003 edition of ‘Compensation for Loss of Pension Rights: Employment Tribunals’, a working party of Employment Judges developed the “Principles for compensating pension loss” which were published in August 2017. This entry explains how the loss of pension under a defined contribution scheme and under a defined benefit scheme are calculated.

Loss of State Pension

The starting position is that the retirement date will be the earlier of (a) state pension age or (b) the retirement age of an occupational pension scheme in which the claimant has accrued significant occupational pension rights. In most cases it is assumed that there will be no loss of state pension rights. This includes additional state pension rights (S2P), which have now been withdrawn. If a tribunal decides it is appropriate to award a sum for loss of state pension rights, the Ogden Tables will be used.

Defined Contribution (DC or money purchase) schemes

Method of calculation

Where the claimant has lost benefits from a DC scheme, pension loss will be calculated on the basis of lost employer contributions as follows:

  • obtain details of the claimant’s pay and employer contributions (the tribunal may assume auto-enrolment levels if there is no evidence);
  • identify the date at which the period of loss ends;
  • calculate the employer contributions to the remedy hearing (no recoupment);
  • calculate the future loss of employer contributions (taking account of future pay rises);
  • credit any employer contributions made by a new employer against the award (again the tribunal may assume auto-enrolment with new employer, rebuttable by evidence).

There is no loss by reason of lost facility to make Additional Voluntary Contributions.

Defined Benefit (DB or final salary) schemes

There are two methods of calculation depending on the complexity of the case.

Simple cases

These could include cases where it is disproportionate to engage in complex analysis (e.g. because of the compensation cap or a relatively short period of loss).

Method of calculation
There will usually be no award for loss of enhancement of accrued pension rights. The pension loss in simple cases should be calculated according to loss of contributions as for DC schemes as follows:

  • obtain details of the employer’s contribution rate (which could be an average for scheme members);
  • identify the date at which the period of loss ends;
  • calculate the employer contributions to the remedy hearing (no recoupment) by applying the average employer contribution rate to the claimant’s gross salary at EDT;
  • calculate the future loss of employer contributions in the same way (taking account of future pay rises);
  • credit any employer contributions made by a new employer against the award (again the tribunal may assume auto-enrolment with the new employer, rebuttable by evidence).

Complex cases

These cases are typically cases with longer periods of loss (e.g. career-long loss cases) and no compensation cap, warranting more complex analysis.

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. The Employment Tribunal’s Agenda for Case Management for Preliminary Hearing now contains a section to identify this at a Case Management Preliminary Hearing. Use of expressions such as “to be confirmed” are discouraged.

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

  • The first stage will identify the non-pension losses and make findings of fact relevant to pension losses. There will then be a period for the parties to try and agree the pensions figure between themselves.
  • The second stage will identify the pension loss, either by using Ogden tables or expert actuarial evidence.

Calculation
There could be two types of loss 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, 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 Ogden Tables 15 to 26 (for annual pension loss) and Ogden Table 27 (for pension lump sums). These tables list multipliers for various discount rates and retirement ages of 50, 55, 60, 65, 70 and 75. Table 28 and Table 29 at the back of this book include the multipliers for a discount rate of -0.75% and for all the retirement ages between 50 and 75.

Method of calculation loss of annual pension using Ogden tables

The Principles identity seven steps that the tribunal and the parties should follow when calculating loss of DB pension rights using the Ogden Tables.

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. This is the multiplicand.

Step 4: Identify the period over which that net annual loss is to be awarded, using the Ogden Tables 15 to 26 (depending on retirement age and gender) or Table 28 and Table 29 at the back of this book to identify the multiplier as follows:

  • Identify the age of the claimant at the date of the remedy hearing (the numbers down the side) and the claimant’s retirement age with a two-year mortality adjustment both to age and the date of retirement. For example, if the claimant is 45 with a retirement age of 67, the adjusted age is 43 and the adjusted retirement age is 65. Interpolation methods should be used where necessary if the retirement age falls between the five-year intervals (see below) (or use Tables 28 and 29);
  • Choose the rate of return (the percentages across the top). The -0.75% column should be used.

Step 5: Multiply the multiplicand by the multiplier to obtain the capitalised value of the lost pension, subject to any further adjustment the tribunal considers appropriate.

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 giving up some of their annual pension) or (ii) a non-commuted lump sum (i.e. one where the annual pension is not reduced). 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 (any lost commuted lump sum will be ignored as this will already have been factored in when calculating annual pension loss).

Calculation method

The calculation of loss of lump sum is as follows:

  • Identify the multiplicand. This is:

the lump sum that would have been paid at retirement if the claimant had not been dismissed

minus

the lump sum they will now receive, taking account of withdrawal factors.

  • Identify the number of years between dismissal and retirement date. This is the number down the side of Table 27.
  • Identify the discount rate (along the top, which is currently -0.75%).
  • Find the appropriate multiplier.
  • Multiply the multiplicand by the multiplier to find the present capital value of that loss.

For example, if the lump sum loss is £5,000 and the number of years to retirement is 25, the capital value of that loss will be:

£5,000 x 1.2071 = £6,035.50

Interpolating between pension ages

The Ogden Tables themselves only list multiplying factors for retirement ages of 50, 55, 60, 65, 70 and 75. However, in a particular case it may be appropriate to use a retirement age of, for example, 62 and it will be necessary to interpolate between 2 values.

Two new tables have therefore been produced which interpolate between the ages for men and women by using the formula on page 9 of the 7th edition of the Ogden tables. A discount rate of -0.75% has been used (see Table 28 and Table 29).

Take a look at our other products and services, including an online resource which will calculate schedules of loss without the pain, at bathpublishing.com/employment.

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