Of interest to all employers where pension loss may be calculated as part of an employee’s unfair dismissal compensation are the recent comments from the Court of Appeal (CA).
In this case, the CA overruled both the Employment Tribunal and Employment Appeal Tribunal on the issue of calculating pension loss after constructive unfair dismissal. However, the CA also commented that the guidelines for calculating the amount of pension loss which should be awarded as compensation were in urgent need of review.
Ms Griffin worked at Derriford Hospital, Plymouth and brought a successful claim in the Employment Tribunal (ET) against the NHS Trust for constructive unfair dismissal and disability discrimination, following a period of illness. The ET assessed her future loss of earnings on the basis of her finding an alternative job within a year of the hearing. Her pension loss was calculated using the “simplified approach”, which calculates pension loss on the basis that, effectively, the employee will be able to enter another open final salary scheme.
Ms Griffin appealed the ET’s decision on remedy, both for loss of earnings and for pension loss. She conceded that she would be able to enter another pension scheme in time, but not that it would be a final salary scheme. The Employment Appeal Tribunal (EAT) remitted the decision back to the ET to review the level of compensation. The ET did increase Ms Griffin’s loss of earnings award but maintained the pension loss calculation, worked out on the simplified basis, was correct. Ms Griffin’s second appeal to the EAT failed, and she appealed to the Court of Appeal (CA).
The CA dismissed her appeal on future loss of earnings issues. However, the CA overruled both the ET and the EAT on the issue of the pension loss calculation. The CA held that the simplified approach did not provide adequate compensation for the loss of enhanced rights in the NHS final salary scheme, and instead applied the “substantial loss” approach. According to the 2003 Compensation for Pension Loss Guidelines, which provide recommendations on pension loss calculations, the substantial loss approach may be used:
“…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.”
Although Ms Griffin was relatively young, her job (as a bone densitometrist) was highly specialised, and (the CA held) she would have been unlikely to have left her job but for the discrimination, and all the factors pointed to a career-long pension loss. The CA invited the parties to reach a compromise on the pension loss figure, although Lord Underhill, who gave the leading judgment, commented that the 2003 guidelines were in urgent need of review, as “the extent to which [their] recommendations on particular points remain valid will increasingly need to be carefully considered.”
From a pensions point of view, this case is interesting principally for the CA’s comments on the 2003 pensions loss guidance. The substantial loss approach to pension compensation was taken in this case as the CA considered, for various reasons, that the claimant would probably have stayed in her job until retirement. However, it is likely that the compensation guidance could be open to future attack from one of the parties on the basis that it is out of date, depending on whether the ET concerned chooses the simple or substantive loss approach to the calculation.
Since 2003, many final salary schemes have switched to the career average basis, and many others have closed to new membership or to future accrual altogether, with employers offering defined contribution benefits going forward. The substantial loss approach is therefore already uncommon and may become more rare as final salary membership diminishes. With this in mind, respondent employers could well argue that those parts of the guidance supporting substantial loss should be ignored, as this approach assumes final salary benefits will feature in a claimant’s future remuneration package.