The Court of Appeal has said that the Employment Tribunal Guidance on calculations of future pension losses is “opaque” and “out of date”. Whilst containing some useful guidance on the correct approach to use in assessing pension loss, the judgment in Griffin v Plymouth NHS Trust also throws doubt on the reliability of the guidance, with the result that parties may be more inclined to instruct expert actuaries to assess pension loss rather than rely on the guidance.

This is a shame since the guidance was intended to enable parties to calculate pension loss without recourse to expert evidence. The decision will be of most relevance in discrimination and whistleblowing cases where compensation is uncapped so detailed expert assessment of pension loss will be worthwhile. The case concerned the assessment of compensation for unfair dismissal and disability discrimination of a 34 year old specialist clinical technician who lost her job with Plymouth NHS Trust and therefore her valuable final salary scheme pension rights.

The current Employment Tribunal Service Guidance published in 2003 provides two options open to the tribunals (in the absence of any alternative approach agreed by the parties): the simplified approach and the substantial approach. The Court of Appeal determined that the employment tribunal had wrongly applied the simplified approach under the Tribunal Guidance when determining her pension loss. It said the Tribunal had misdirected itself when weighing certain factors such as length of service and the Claimant’s age. Using the simplified approach, the Tribunal assessed pension loss at GBP 32,827.69, based on a finding that the Claimant would be able to join a final salary pension scheme again after four years. Using the substantial approach, the loss would be much greater (see below).

Drilling down into the guidelines, there is certainly scope for misinterpretation. The focus is very much on final salary schemes, at the expense of detail on how to treat defined contribution (DC) scheme losses – although in general terms, the guidelines state that DC losses lend themselves to the simplified approach. So which approach to choose?

The two approaches

Using the substantial approach, the starting point is to calculate the capital value of future pension rights up to retirement – as though the claimant had continued in the old employment for her whole career. The formula in the Guidance takes into account the loss of enhancement to the final salary pension which would have occurred due to raises in salary. From this sum are deducted the value of any new final salary pension rights (in a new job) and the pension rights that accrued up to the date of dismissal. This is then subjected to a discount to reflect the possibility of leaving employment before retirement.

The Tribunal in Griffin applied the simplified approach, which is based on the contributions paid to the final salary scheme. It worked out how much the NHS Trust would have paid in contributions to the claimant’s pension savings between the dismissal and the hearing, and beyond that to the date at which the claimant finds a new job. It then adjusted this figure twice: once to account for the percentage chance that the claimant would have left her job before retirement, and a second time to reflect the nature of employer contributions in a final salary scheme.

The Guidance suggests the simplified approach will usually be appropriate in cases where there is a short lapse between the dismissal and the beginning of new employment. The Guidance itself acknowledges that the simplified approach is not technically correct as there is no direct correlation between contributions and the benefit payable from a final salary scheme. On the other hand, the substantial approach should usually apply where:

  • A claimant has been in the respondent’s employment for a considerable time
  • The work is stable and not affected by economic cycles
  • Where the claimant’s age may act as a deterrent against moving jobs

On the facts, the Court of Appeal decided the EAT was wrong to take the simplified approach. Though the claimant was 34, the specialist nature of her skills and the low demand for clinical technicians with her experience locally meant she was highly unlikely to have left before retirement. When assessing whether she had been in the employ of the Trust “for a considerable time”, per the Guidance, the tribunal failed to consider the question of whether she would have remained in the job until retirement but for the dismissal.

These personal circumstances brought her case within the conditions for using the substantial approach: the work was stable and unaffected by economic cycles; the claimant’s disability made her more likely to remain with her employer long–term.

What this means for employers

The Court of Appeal’s decision begs a broader question of where we stand with the Guidance. Lord Justice Underhill called on HM Courts and Tribunal Service and/or Judicial College to give priority to updating the Guidance.

In the absence of updated Guidance, claimants may be prompted to seek expert advice from actuaries when assessing losses. At the very least, the assumptions underpinning the substantial approach are out of date: one would not expect trustees of a final salary scheme to carry out a triennial valuation in 2014 on the same assumptions used in 2003. But employers who have changed their final salary scheme – by reducing the accrual rate or switching to career average – may also find that the substantial approach in Guidelines overstates the loss. The result may be that – unless updated – the Guidance will soon be ignored in favour of expert evidence.

With the closure of more and more final salary schemes to new employees, there is a greater incentive for employees to litigate more aggressively in the event that they lose their employment and hence their valuable future pension rights. The unfair dismissal cap is currently limited to GBP 76,574 or a year’s pay (whichever is the lower amount), so parties may be reluctant to pay for expensive actuarial reports on pension loss. However, for discrimination and whistleblowing claims where compensation is uncapped, claimants may be more inclined to pay for this advice, rather than follow unreliable guidance.

It is hoped HMCTS and the Judicial College will review and update the Pensions Guidance as a priority, as suggested by the Court of Appeal.