Prior to the 1st October 2012, an employer was not obliged to set up a pension scheme for its employees. However, in light of the so called pensions crisis, the last Labour government introduced The Pensions Act 2008. For the first time, employers are required to automatically enroll workers into a workplace pension scheme if certain criteria are met.
“There are three kinds of actuaries. Those that can count. And those that can't.”
Pension jokes are thin on the ground. That was the best I could do in an effort to brighten up a talk I recently gave to the ELA entitled “Pension Loss Claims in the Employment Tribunal”, on a dreary September evening. Let’s face it, dealing with pension loss issues is probably not the highlight of most employment lawyer’s weeks. However, particularly given the auto-enrolment provisions apply to a greater number of businesses each month, getting to grips with such issues in ordinary employment tribunal claims is an important part of properly valuing a claim.
Prior to the 1st October 2012, an employer was not obliged to set up a pension scheme for its employees. In light of the “pensions crisis”, the last Labour government introduced The Pensions Act 2008. For the first time, employers are required to automatically enrol workers into a workplace pension scheme if certain criteria are met. Principally: the workers are aged between 22 and state pension age; they earn more than a statutory minimum sum (currently £9,440 a year); they work in the UK. The date employers are obliged to do this depends on their size and at present, any company with more than 500 employees in their PAYE scheme are covered. By this time next year, that will be down to employers with 59 employees or more. By early 2018, it will apply to all employers. Workers are entitled to opt out but they will be automatically re-enrolled every 3 years.
Although employers can offer defined benefit and defined contribution schemes, it seems highly unlikely that employers will choose the former given their general unpopularity due to cost. The focus is going to be on defined contribution schemes. The level of contribution for such schemes is also to be phased in, such that by 1st October 2018 there must be a minimum total contribution of 8% to the pension pot, of which at least 3% must be from the employer. Assuming the employer paid the minimum, that would leave the employee contributing 4%, the remaining 1% coming from tax relief.
In practice, contributions at this level will not produce a significant pension. It has been estimated by an actuary that can count, that a 30 year old earning £20,000 now and making minimum contributions, seeing pay rises just above the rate of inflation until retirement at age 70, would receive a pension of probably just over £2,000 at today’s prices.
What auto-enrolment means is that in most claims for compensation involving lost remuneration, there will be a pension loss claim. A claim will need to be made and resisted. Claims for pension loss are generally regarded as the most difficult aspect of the compensation calculation. However, the good news for those dealing with basic defined contribution auto-enrolment type schemes is calculations are very straightforward. The difficulties come in the calculation of final salary schemes, which are on their way out.
The Court of Appeal made clear in Aegon UK Corp Services –v- Roberts  EWCA Civ 932 that pension claims do not have any particular special status. They are simply to be treated as part of overall remuneration and, although difficult, tribunals must not avoid translating pension values into monetary terms.
For defined contribution schemes, a simple calculation of the benefits which the employer would have paid into the scheme up to the date of the hearing and for whatever period the tribunal specifies for future loss is essentially all that is required. It is important though for claimants not to miss out their own pension contributions. This is easily done if the loss of earnings claim is based on the net wage as set out in the payslips (employee contributions having already been deducted) and the claim for pension loss is based purely on the employer’s contributions. Although these sums are likely to be small for those on modest salaries contributing to pensions at minimum levels, they could become more significant for bigger earners.
Final salary schemes are more complicated. One of the key issues is usually which method of calculation to adopt: the substantial loss approach or the simplified loss approach (or indeed some other approach e.g. the Ogden Tables). Although there is no clearly defined answer, a crude way to think about it may be that the simplified loss approach is generally appropriate unless there is a clearly identifiable, quantifiable loss. An employee who has been with their former employer for a considerable period of time in stable employment, who is unlikely to be affected by the economic cycle and unlikely to be looking for new pastures, is a good example of the latter.
These issues were considered in Sibbit –v- Governing Body of St. Cuthbert’s Catholic Primary School  UKEAT/70/10 and by the now president Langstaff P in Chief Constable of West Midlands Police –v- Gardner UKEAT/0174/11/DA. In the latter case, the loss was clearly quantifiable and the substantial loss approach ought to have been employed.
In straightforward claims for unfair dismissal, the change in the statutory cap to a year’s pay or £72,400, whichever is less, may mean complicated pension issues are less frequently litigated, as they were pre 1999 when the cap was only £12,000. However, in other jurisdictions where uncapped compensation is available, pension loss can be the most significant component of the claim.
Those keen to explore these issues further are welcome to read the handout from the ELA talk (which can be found here) which makes for good bedtime reading (at least for those looking for an early night!).