The Employment Appeal Tribunal (EAT) confirmed that a tribunal is entitled to differentiate between a final salary pension scheme and a money purchase scheme when awarding compensation to an unfairly dismissed employee.
In the February case of Roberts v Aegon UK Corporate Services Ltd, the EAT was asked to confirm how pension loss should be treated where the dismissed employee, Ms Roberts, had previously been a member of the employer's final salary scheme. Following her dismissal, Ms Roberts did in fact obtain alternative employment, which, ignoring the value of pension benefits, provided a better remuneration package in terms of salary and other, non-pension, benefits. However, in relation to pension provision, the new employment provided only for contributions to a money purchase scheme.
The new employment was subsequently terminated. The Tribunal determined that although Ms Roberts' new employment had brought to an end any possible ongoing loss of earnings claim against her former employer, there was still ongoing pension loss by reason of the different nature of the pension provision. Therefore Ms Roberts was still entitled to claim for loss of pension.
The employer appealed on the basis that the Tribunal should have taken the same view for pension loss as for other loss of earnings. The employer said the Tribunal should not have separated out the two components, particularly as if one carried out an arithmetic exercise in comparing the better remuneration at the new employer with the less favourable pension arrangements, Ms Roberts was allegedly still better off with the package being offered by the new employer.
The Tribunal had noted that final salary schemes are "being eased out in the private sector and it is unlikely that the claimant will find employment in which she will have the benefit of a final salary scheme". Indeed, an employment expert had given oral evidence that any new employment would more than likely involve a money purchase scheme, rather than offering a final salary pension.
The Tribunal considered whether it had to "throw in the pension loss with the loss of other benefits and then to compare the whole old remuneration package with the new remuneration package, and if the new package was the same or more than the old to conclude that the pension loss had ceased when the claimant obtained the new employment". It determined that the answer to both questions was in the negative. The pension loss stemmed from the fact that Ms Roberts enjoyed the benefit of a final salary pension which was lost when she was unfairly dismissed and was unlikely to be obtained again in any other new employment. As such, it was a continuing loss (even though it could be reduced by obtaining the benefit of a money purchase scheme and/or higher salary in the future) and did not simply cease as and when Ms Roberts gained new employment.
The EAT agreed with the Tribunal's approach, stating that the Tribunal was entitled to form the view that the loss of a final salary pensions scheme was a very significant factor, the loss of which could not be quantified in purely monetary terms. The EAT said "it is well known that in a final salary scheme the risk is very much on the employer and the reverse is true as far as the money purchase scheme is concerned and we are quite certain that it was in particular that element of risk the Tribunal must have had in mind." In fact, the EAT considered that the loss of a final salary scheme benefit would have continued for so long as the Tribunal determined that Ms Roberts' employment with her former employer would have continued, namely, up to the age of 50.
Consequently, Ms Roberts was entitled to compensation for loss of pension up to that point.
It is clear the EAT considers that a Tribunal is able to compensate unfairly dismissed employees for loss of final salary pension rights beyond the period for loss of salary and other benefits and that the value of the final salary benefits is considered separately. This could pose a significant cost in unfair dismissal claims, particularly in the current market where dismissed employees may feel more likely to sue former employers. It could also pose a significant cost where the dismissed employee has a considerable period of time left to go to retirement and where any discrimination element removes the compensation cap!
Interestingly, although the EAT discussed the fact that final salary schemes are being "eased out" (as they put it), there was no discussion of the fact that many final salary schemes are in fact terminating future rights for existing employees, with the result that there is no guarantee that Ms Roberts would continue to enjoy the benefits of a final salary scheme, even if she had not been dismissed. In fact, given the current economic climate and deficits affecting pension funds, it is likely that not only will final salary schemes be "eased out", but that more and more simply close for future benefit, even to existing members.
Permission for leave to appeal is currently being sought and it will be interesting to see what the Court of Appeal decides. Employers should prepare mitigation arguments carefully!