As to pension loss, the Court of Appeal was careful to state that the only issue for them was whether it had been an error of law to use the simplified approach to pension loss instead of the substantial loss approach, and that the judgment should not be treated as an attempt at a comprehensive summary of the Pensions Guidance nor used as a short-cut where different issues arise. Underhill LJ then reminded himself that in a final salary scheme the employee’s entitlement is simply to the benefits and there is no entitlement to the employer’s pension contributions. The loss takes the form of loss of enhancement to accrued pension rights and loss of acquisition of future rights. For loss of enhancement, actuarial tables are provided in the Pensions Guidance. Only the latter head of loss should be affected by the choice between the simplified and substantial loss approaches. The essential difference between the two approaches is that when assessing pension losses arising in the period after termination of employment, the simplified approach measures loss by reference to the employer’s pension contributions, regardless of the fact that it was a final salary pension scheme. The substantial loss approach requires the use of actuarial tables comparable to the Ogden Tables. After using the tables, the Tribunal generally has to apply withdrawal factors to reflect the probability that the particular employee before it would have left employment before retirement age other than for the usual risks of mortality and disability.
Underhill LJ noted in passing that he respectfully agreed with Elias P’s criticism of the Pensions Guidance in Network Rail Infrastructure Ltd v Booth, that, where an employee had lost employment with a final salary pension scheme but obtained new employment with a money purchase pension scheme, it was unnatural to take account of the new employer’s pension contributions when assessing loss of earnings, but to disregard them when calculating pension loss, as the Pensions Guidance required.
For Underhill LJ, the tendency of the Pensions Guidance to limit the use of the substantial loss approach to cases, in which the employment had continued for a long time, the employment was very stable, and the employee had reached a certain age where she was less likely to move on, was explained by the fact that those three factors increased the likelihood of the employee still being an active member of the pension scheme at retirement – which would justify an assumption of “whole-career loss”. Such an employee was to be contrasted with an employee who probably would have changed jobs anyway after a couple of years.
Pragmatically, the Court of Appeal pointed out that if the substantial loss approach were taken and then a massive, intuitive, withdrawal factor had to be applied, the level of uncertainty would beg the question whether there had been any point in attempting to assess whole-career loss in the first place.
Underhill LJ confessed to finding that section of the Pensions Guidance “a little opaque” but considered it clear that the substantial loss approach was recommended only where there was a sufficiently firm basis for the necessary assumptions, eg where the employee had already found new employment, or it had been determined that the employee would never find new employment, or a date had been found by which the employee would have found new employment.
Underhill LJ criticised the Tribunal for rejecting the substantial loss approach solely on the basis that, when considering whether the Claimant had been in the Respondent’s employment “for a considerable time” it said that that factor did not apply where the Claimant, aged 34, was still a long way from retirement. The Tribunal had failed to address the question of how likely the Claimant had been to stay in that employment until retirement. On the facts of the particular case, he pointed out, the Claimant was an employee with a specialist skill for which the principal, if not indeed the only, market was in the NHS, so she was likely to remain in the NHS for her entire career despite being 34. Furthermore, her medical condition made her cautious about embarking on a major career change.
Noting that the Tribunal had applied a withdrawal factor of 20% to the calculation of loss of enhancement, the Court of Appeal said that that finding, even though made for a different purpose, was inconsistent with the finding that the uncertainties of the Claimant’s continued NHS employment were so great as to rule out the substantial loss approach to loss of future pension rights. Underhill LJ relied on the Network Rail case to back up his views.
The Court of Appeal further criticised the Tribunal for assessing the likelihood of the Claimant eventually regaining her pre-dismissal earnings after 12 years instead of doing its proper task of calculating her pension losses.
Underhill LJ observed that the Tribunal had found that the Claimant would have obtained employment with the benefit of a final salary pension scheme after four years, but had not relied on that factor when rejecting the substantial loss approach. The Court of Appeal considered that the Tribunal had had no proper basis for rejecting the expert’s unchallenged evidence that it had been unlikely that any future employer would offer a final salary scheme as most of these are closed to new entrants.
The Court of Appeal held that the Tribunal misdirected itself in the reasons it gave for applying the simplified loss approach and that in the particular circumstances of the case and in the light of other findings, the only correct conclusion was to apply the substantial loss approach.
The Pensions Guidance
In conclusion, Underhill LJ pointed out that although the Pensions Guidance was extremely valuable, it had no statutory force and its recommendations are “not gospel”. Further, there have been several important changes in pension law since 2003, other changes are forthcoming, and the current Pensions Guidance is out of date. He urged HMCTS and the Judicial College to review and update the Pensions Guidance as a priority.
As fewer and fewer new employees are able to join final salary pension schemes, public sector employees are becoming more and more aware of the very valuable pension rights which they enjoy, which they simply cannot replicate elsewhere. Therefore, there are many incentives for public sector employees to litigate aggressively on pensions issues.
The current cap on compensation for unfair dismissal is £76,574, although, for dismissals after 29 July 2013, a Tribunal may not award a successful Claimant more than one year’s gross earnings. This case, involving disability discrimination, illustrates the increasing discrepancy between compensation for unfair dismissal claims and compensation for discrimination or whistleblowing claims.
Nevertheless, in practice, the cap on unfair dismissal compensation has created a dangerous tendency for parties in employment litigation to start with a rough and ready, and rather short-term, approach towards the analysis of the future losses caused by a statutory tort. Given the current high rate of settlement in employment disputes, it is unsurprising that parties are slow to expend time and costs on a very detailed schedule of loss at an early stage in proceedings. Likewise, given the fact that many cases do settle in the period between the liability and the remedy hearing, parties, for good reasons, often dally in preparing and sharing their rigorous calculations of loss of future earnings and pension loss.
The assessment of future loss of earnings and of pension loss is a complicated and time-consuming matter, which requires the careful collection of relevant evidence, its analysis, an attempt to speculate about the future in a logical and rational manner, and a series of precise mathematical calculations. It is refreshing to the see the Court of Appeal grappling with the outdated and awkward Pensions Guidance, which practitioners have found so difficult to apply in practice over the years. As Underhill LJ points out, an updated version of the Pensions Guidance is overdue and will be very helpful to the Employment Tribunals, employers, employees, and their advisers.
As with any interesting appellate judgment, the implications of this case are limited by its specific facts, and other questions remain unanswered – in particular whether it would be an error of law not to use the Ogden Tables when assessing compensation in a case of lifetime career loss.