Employers face increased pension loss payouts after NHS case

02 October 2014

Employers may be liable to pay increased compensation relating to pension loss to employees dismissedunfairly, lawyers have warned, after a tribunal appeal found an earlier decision had miscalculated the sum owed to an NHS scheme member.

We are grateful to Pensions Expert for bringing us this report:

The employee brought the claim against Plymouth Hospital NHS Trust on the grounds of constructive unfair dismissal and disability discrimination, and was awarded £105,643 for past and future loss of earnings, and future pension losses.

However, on appeal, the judge ruled the 'substantial loss' rather than the simplified approach should be used for calculating the future pension losses of the claimant, who was a member of a final salary scheme.

The substantial loss approach will generally produce the higher award since it assumes whole-career loss.Whereas the simplified approach calculates pension loss by adding together the loss of enhancement to pension rights, loss of employer contributions to the hearing date and the loss of future employer contributions.

The employee's award was increased to £166,595.Plymouth Hospital NHS Trust said it was unable to comment as the case is ongoing.

According to the Compensation for Loss of Pension Rights guidance, released by chair of employment tribunals and the government actuary, the substantial loss approach may be chosen "in cases where the person dismissed has been in the respondent's employment for a considerable time, where the employment was of a stable nature and unlikely to be affected by the economic cycle and where the person dismissed has reached an age where he is less likely to be looking for new pastures".

The tribunal found due to the highly specialist nature of the employee’s job – as a clinical hospital technician – they would have remained with the employer, and therefore been an active member of the scheme, until retirement.

Anne-Marie Winton, partner at law firm Nabarro, said:“[The] calculations in that guidance are based on assumptions that if you’re in a final salary scheme, when you get a new job you’ll go back into an open final salary scheme.” Since this approach to calculating pension losses is only guidance, the judge may also take into account more current pensions practice, she said, which could result in a claimant being entitled to a greater amount of compensation.

However the judgment also recommended the guidance used for assessing future pension loss was in need of review. It stated:“There have been a number of important changes in pension law and practice since the current edition of the guidance was published in 2003, and others are imminent: the extent to which its recommendations on particular points remain valid will increasingly need to be carefully considered.”

Mark Howard, partner at law firm Clyde & Co, said in future claimants may look at this section and “realise there is scope to attack the guidance itself as being out of date".

“Employers faced with claims should anticipate this and consider what might the pensions loss be based on more up-to-date assumptions,” he said. However, Howard said it is not just the claimant who might argue the guidance should be ignored since the substantial loss approach assumes a final salary pension scheme.“Since 2003, some final salary schemes will have switched to career average, so the pensions loss would be less than the substantial loss approach would imply,” he said.

Lesley Browning, partner at law firm Norton Rose Fulbright, said while the substantial loss approach is already uncommon, it will become even less so as final salary membership diminishes. “Historically the substantial loss approach was used in a lot of cases, for example armed forces cases where a woman was unfairly dismissed because she was pregnant,” added Browning.