Pension loss and avoiding negligence claims
November 20, 2017
- Occupational pensions are a regular, and nearing universal, feature of employment today. With increasing life expectancy, successive Governments have repeatedly sought to encourage saving towards retirement (whether alone or with input from an employer). In each and every claim in which a loss of earnings is advanced, consideration must be given to potential pension loss. A pension loss may be claimable even in the absence of a loss of earnings (as with, for example, a soldier who replaces military employment with a better paid civilian role, albeit one without the benefits of a final salary pension scheme). With the increased scrutiny applying to the conduct of claims, it is vital that you are able to show that active consideration has been given to pension loss as may be appropriate. Anecdotally, this is one of the potential growth areas identified by the new breed of professional negligence “specialists”.
Types of occupational pension
- There are several different types of pension benefit schemes provided by employers. The two principal types are the “defined benefit scheme” (final salary scheme) and the “defined contribution scheme” (money purchase scheme).
- The first type was previously the more common, particularly in public authority employment such as teaching, local government, the police and fire services and the armed forces. Under this scheme the “final salary” of the employee is central and his pension is calculated by reference to the final salary at retirement age and the number of years worked. Invariably there will be a formula to calculate a fraction of the average of several years’ earnings, and there will be an option in the contractual scheme to commute part of the pension to enable a tax-free lump sum to be taken on retirement. More recently, there has been a tendency for employers either to close membership of the final salary scheme or to move towards a “career average” model, where it is the average earnings over the working lifetime that is determinative. Clearly, that measure is primarily designed to lower the pension benefits payable to an employee, but it further addresses the manipulation of the previous system (e.g. the common career choice of those in the police to remain a Sergeant, with an entitlement to overtime, until the very last few years of service when promotion to Inspector is sought so as to maximise the pension).
- In a “money purchase scheme”, by contrast, contributions are paid into an investment fund. The funds accumulate at a rate dependent on the investments, and are converted into an annuity and/or a tax-free lump sum at retirement (N.B. while the compulsion to purchase an annuity has now been removed, with various alternatives available to members of such schemes, that is of little significance when addressing pension loss claims). Contributions can be made by the employee and/or the employer.
Pension loss in defined benefit schemes
- This will be the “conventional” pension loss claim. It will almost invariably be higher than the loss arising from a defined contribution scheme, given the attractive benefits payable under a final salary scheme. The claims can be very sizeable indeed, particularly given the current discount rate. By way of example, in a military case involving service for the standard full term of 24 years, a pension may be payable for life from age 42. With current life expectancy, the pension multiplier for a man aged 25 will be 61.85!
- The calculation of the relevant loss is straightforward. Once the relevant information has been obtained (as below), an annual loss is calculated and the relevant multiplier is applied. Any loss of lump sum is calculated and then adjusted to reflect advanced receipt.
- It will usually be necessary to obtain a copy of the full terms of the pension scheme. Ordinarily, particularly with public sector employment (e.g. the Civil Service Pension Scheme or the various Armed Forces schemes), the rules will be available online. There may also be online calculators providing forecasts based on the different scenarios.
- A number of points arise:
- The lead case remains that of Auty v National Coal Board. In Auty a discount was applied to reflect contingencies and imponderables. Although there has been criticism that this may amount to a double discount, it remains good law. Guidance as to the appropriate level of discount is hard to find.
- Defined benefit schemes conventionally allow for payment of a widow’s pension following the death of the primary beneficiary. The widow’s pension entitlement is frequently 50% of that of the primary beneficiary. Take care to check whether the widow is likely to outlive the claimant.
- Defined benefit schemes may give rise to an entitlement to both a lump sum and annual pension or to just an annual pension (albeit in the latter case it is usually possible to commute part of the annual pension into a lump sum). In the absence of clear instructions from a claimant as to comminution, that possibility is often ignored (since, actuarily, the total value of the pension benefits should remain the same).
- Not all of a claimant’s annual remuneration may fall to be taken into account when assessing their pension benefits. The “pensionable earnings” are usually different to the total gross earnings. The rules of the scheme should assist.
- A claimant may receive an early ill-health pension on retirement post-accident. Annual receipts from such a pension are only taken into account following the date of the anticipated retirement (Parry v Cleaver). If a lump sum is received, only that part referable to the period post-anticipated retirement falls to be taken into account (Longden v British Coal Corporation).
- The pension benefits payable over time may not be fixed. For example, while a soldier is entitled to an immediate pension after serving for, say, 24 years the value of the resulting benefits will increase following the state retirement age.
- Credit has to be given in any loss of earnings claim for the pension contributions that the claimant would have made.
Pension loss in defined contribution schemes
- In such schemes Fund Managers will often prepare predicted valuations for the investments based on a number of different rates of return (eg. 5%, 7% or 9%). I have seen reports from accountants/IFAs seeking to do the same thing. That evidence is of no benefit. It is inappropriate to ask the court to speculate as to the value of such a fund at some date in the future. The court could not do so with any cogency and one can see that issues as to the discount rate might arise. Rather, the appropriate measure of loss relates to the loss of contributions that would have been made by the employer. Once the claimant has received those lost payments, he will then be able to make up any contributions into the relevant fund as he might wish (N.B. the only way in which a loss can arise relates to tax relief – that is discussed further below). Likewise, so long as his loss of earnings is claimed gross of his own pension contributions, there will be no loss of pension arising from those lost contributions.
- The ONS publishes annual figures as to the average level of employer contributions into defined contribution schemes. In the absence of fixed employment pre-accident (such as in the case of a child), calculation of the various pension losses by reference to the average level of contributions may be appropriate. In 2015 (the latest report published – in September 2016) the average total contributions into defined contribution schemes were 4%, 1.5% from employees and 2.5% from employers.
- When looking at the lost contributions, it is important to recognise that those contributions will be assessed by reference to gross not net earnings.
- The relevant multiplier will be the loss of earnings multiplier, discounted as appropriate, because any contributions are contingent upon employment and earnings.
- Payments made into an occupational pension attract tax relief. Under the current stakeholder scheme, however, pension tax relief can be obtained even by someone with no earnings (up to a maximum level of contributions of £3,600/yr). Accordingly, in the case of a basic rate tax payer with relatively modest annual contributions, there is unlikely to be a loss of tax relief.
- A different situation will apply where the claimant is a higher rate taxpayer prior to their accident. There may then be a claim for the loss of higher rate tax relief.
- In cases involving high earners with substantial pension pots, issues as to the lifetime allowances may arise. Similarly, issues may arise as to the cap on annual contributions. Both issues would require specific consideration and might require accountancy evidence on point.
The Pensions Act
- As noted above, successive Governments have sought to encourage saving towards retirement. From October 2012 all employers must offer a workplace pension scheme. That has already become compulsory for larger employers. Employees are automatically enrolled provided that they are eligible. The vast bulk of those working will be eligible (N.B. the criteria are relatively straightforward and can be found online). An employee is entitled to opt out of auto-enrolment.
- Where an employer was yet to contribute into a workplace scheme, enquiries will have to be made as to the likely contributions in the future.
- Self-evidently, someone who is self-employed has no claim for the loss of employer contributions. They may have a claim for the loss of tax relief on their own contributions. Even if a claimant was self-employed pre-accident, check whether that would necessarily have remained the case in the longer term.
The state pension
- Not all will necessarily be entitled to a full state pension (N.B. this may be subject to change). Various calculators exist online to determine an individual’s likely state pension. An entitlement may drop by virtue of lower NI contributions. Don’t forget to check.
- Consider a claim for pension loss in every case.
- The only cases where a pension loss claim cannot be pursued will be those where:
- The claimant was not a member of a pension scheme pre-accident and would not, on the facts, have become a member of one in the future;
- The claimant had already retired;
- The claimant has obtained alternative employment with more attractive pension benefits.
- Don’t forget a potential claim for the loss of tax relief;
- Accountancy/expert evidence will often be difficult to justify, particularly in the current climate and with costs budgeting.
 If the loss flows from age 55, 60, 65 and so on, the relevant Ogden Table can be adopted; otherwise, the anticipated period of loss is assessed and a fixed term multiplier is used, discounted to reflect advanced receipt.
 (1985) 1 All ER 930
 The further discount applied by the trial judge in Auty was 27% to reflect “other contingencies”. More swingeing discounts have been made before and since. For instance, see Lim Poh Choo v Camden and Islington Area Health Authority  AC 174 (further discount of 57%), Roberson v Lestreange  1 All ER 950 (further discount of 65%) and Birkett v Hayes  1 WLR 816 (further discount of 57%). Contrasted to these is Anderson v Davis  PIQR Q87 (discount of 12%) and Phipps v Brooks Dry Cleaning Services Ltd.  PIQR Q100.
  AC 1
  3 WLR 1336
 Contrast, by way of interest, average contributions into defined benefit schemes of 5% for employees and 16.2% for employers.