For what pensionable salary is, you need to read the scheme. It is often gross basic salary (i.e. gross, but not counting overtime etc).

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1 THE BASICS Understanding pension Schemes 1. There are two basic types:- (1.1) Final Salary Schemes (also known as defined benefit schemes). The deal here is that you get back a proportion of your final (or in some schemes average) salary for every year of employment. In a typical 80ths scheme, an employer with 25 years service would, on retirement, get 25/80ths of final pensionable 1 salary as annual pension for life. (1.2) Contributory Schemes (also known as money purchase schemes or defined contribution schemes). The idea with such schemes is that you get back what you (and your employer) put in, as it has increased or decreased whilst invested over the 2 years. You buy an annuity with whatever is available to you, and the annuity pays your annual income. Thus this type of scheme is much less predictable than a final salary scheme:- you don t know how big the pension pot will be, and you don t know what annuity you will be able to buy when you come to do so (since annuity costs increase and decrease with interest and the markets). 2. A complication is that pension gets paid in two ways:- (2.1) The annual pension (which is probably what you think about when you hear the word pension ); and possibly (2.2) A tax-free lump sum. It is open to employees to take part of their pension pot tax-free and up-front. In a money-purchase scheme that reduces the sum which is available to provide annual income (meaning that they get less per year for life), but as it is tax-free, it can be attractive. In a final salary scheme the lump sum is sometimes provided for as an extra to the annual pension based on years service (3x annual pension is common). 1 For what pensionable salary is, you need to read the scheme. It is often gross basic salary (i.e. gross, but not counting overtime etc). 2 Purchase of an annuity has been compulsory, but is expected to stop being compulsory in the next year. 1

2 3. If, because of an injury, a claimant is unable to work/ earn as much as pre-injury, (s)he might suffer loss of pension. Short periods off work do not usually lead to a pension loss (although the method of checking is the same as set out below). LOSS CALCULATION:- MONEY PURCHASE SCHEMES 4. Consider a claimant who was in a money purchase scheme who, because of an accident will not work again. What is his loss? (4.1) He has lost the value of the employer s contributions to the scheme. (4.2) He has lost the growth which would have been expected in respect of employer contributions. (4.3) He has not lost his own contributions to the scheme, but, if the loss of earnings calculation works on the basis of his pre-accident net pay (which it is bound to do), that figure already has the deduction for employee s pension contribution taken into account (so this figure needs to be added back somehow). (4.4) He has lost the growth which would have been expected in respect of employee contributions. (4.5) He has lost the tax benefit of the treatment of pension contributions. 5. These losses can be dealt with in different ways. A simple approach is:- (5.1) Ignore the lost benefit which might have been secured through the growth of the fund over time. C is getting damages up front, and can still invest them (indeed they are only discounted on the basis of likely growth of 2.5%:- whilst that is generally considered to be too high by comparison with government backed stocks, most pension funds would expect to do better than 2.5%). 2

3 (5.2) Do not deduct the employee s contributions from his gross salary to reach net salary for the loss of earnings claim. It can be clearer to add back this sum separately. (5.3) Find out how much the employer contributed and add it to the loss of earnings claim. 6. Tax (6.1) A problem with the above simple approach is that an individual receives tax benefits when contributing to a pension fund (on both employer and employee contributions) and when drawing money out of the fund. If contributions are relatively modest it is intellectually honest to overlook the tax benefit on the basis that the claimant receiving damages can contribute to a pension fund and thereby receive the same tax advantages as an employee contributing to the fund. (6.2) Kemp overlooks this tax issue and at paragraph offers the opinion A valid claim for loss of pension benefits in a money purchase scheme is likely to be restricted to the further contributions that would have been made to the claimant s pension scheme by their employer, had the employee not been injured and had been able to continue working. It is necessary to look at that more closely... (6.3) In 2001, stakeholder 3 pensions were introduced. One of the rules of stakeholder pensions is that contributions can be made up to 3,600 per year regardless of level of income (with tax being paid back even if no tax was paid in the first place). So an injured claimant who earned nothing after the accident can continue to contribute anything up to 300 per month. (6.4) It is if C s contributions to the pension would have been over that figure that (s)he cannot use a stakeholder pension to avoid loss. 3 This name is daft. It tells you nothing. Stakeholder pensions are simply a type of pension with particular rules (relating to fees, contributions etc). 3

4 (6.5) For pension contributions over 3,600 per year, there is dispute between reputable sources as to what the position is. (i) Peter Andrews QC writing in Kemp says that from April 2006 claimants have been able to make larger taxallowable pension contributions to the same level that could have been made but for the accident, so there is no valid claim for loss of tax benefits. (ii) Latimer-Sayer, Langstaff et al (also Butterworth s PILS) consider that the upper limit remains at 3,600. I have not had cause to resolve this dispute, although I am fairly confident that Langstaff is right and Kemp is wrong. 7. A more thorough approach (which would require a forensic accountant to perform it) would be:- But for the accident Discover current value of fund (from pension provider) [a]. Calculate missed contributions (from employee and employer) [b]. Calculate likely value of fund at retirement given [a], [b], and an assumed rate of investment return on the fund. On that basis calculate (1) the lump sum benefit which would have been received (discounted to present day value); and (2) gross annual pension (based on annuity tables). Given the accident Calculate likely actual value of fund at retirement on the basis of [a] above (with suitable assumed rate of return). Calculate (1) the lump sum benefit which will be received (discounted to present day value); and (2) gross annual pension (based on annuity tables). Loss Calculate the lost lump sum (at present day value), Calculate the loss of annual pension after tax (table H1 in Facts & Figures will net down), apply the Ogden multiplier. 4

5 8. The simplest (and arguably best) approach to loss in a money purchase scheme is to simply:- (8.1) Add the lost employer s contributions to the claim (including any chance of higher contributions in future); and (8.2) Add back the employee s contributions to the pension fund which would otherwise have been deducted to get to his net income (including any future chance increase) 4. However, when dealing with a higher value claim, this approach is likely to understate the tax advantages of pension contributions when they are over 3,600 p.a., in which case it will be necessary to involve an accountant or take a rough and ready approach to lost tax benefit which would be:- (8.3) Calculate lost tax benefit as 20% of the pension contributions above 3,600 which would otherwise have been made (per year). LOSS CALCULATION:- FINAL SALARY SCHEMES 9. The loss can include:- (9.1) Reduced annual pension because of reduction in qualifying years of service. (9.2) Reduced annual pension due to early retirement pensionable salary being lower then it would otherwise have been. [Note that as with loss of earnings, the court does not take into account likely future wage inflation. The court can, however, take into account the chance of future promotion (and accordingly increased salary). It does so on a chance assessment basis (not balance of probabilities) see e.g. Brown v. MoD [2006] EWCA Civ 546. (9.3) Reduced annual pension due to being able to return to work but only in lower paid employment (such that the final salary will be lower). (9.4) Lost lump sum. 4 Note that you need to work on current salary level (not allowing for likely (ordinary) wage increases), but you ought include the chance of future promotion. See 9.2 below. 5

6 Annual loss multiplier 10. Determined by C s age at date of assessment and intended retirement age. See Ogden tables (loss of pension from starting point 50 through to starting point 75 for men and women). If the table does not quite hit the right intended retirement date, adjust the multiplier in the usual way (see notes to the Ogden tables if in any doubt). Note that there is a good chance that for any man born after 5/12/53 or woman born after 5/4/50, the tables might well miss the appropriate intended retirement date. Many claimants say that they would work to state retirement age, and that is being equalised between men and women, and extended (such that anyone born after 5/4/78 now has a state pension age of 68). For a handy table showing a Summary of SPAs and SPDs, see tor%20-%20latest.pdf 11. As a top tip on odd multipliers, remember that when:- Unadjusted pension loss multiplier is [a]; Unadjusted working life multiplier is [b]; and Full life multiplier is [c]. Then [a] + [b] = [c] 12. The multiplier needs to be discounted to reflect contingencies other than mortality. Read any text-book on this and it will give lots of detail of Auty v. NCB. The essential approach of the court in that case was to take a guess at how to discount pension loss for contingencies other than mortality (and a guess which was unfavourable to claimants). The modern approach is to use the Ogden tables which deal with contingencies on a more scientific basis. Everyone still calls this an Auty calculation, but it is not the same approach as in Auty; we are, however, still talking about discounting for contingencies other than mortality. Some courts will use Ogden tables A to D (unless a (typically more stingy) Auty deduction is to 6

7 be made), but note 30 to the tables says that tables A-D do not apply to pension loss. That note also gives a steer on how to adapt the table A-D adjustments given the facts. There is no simple right way to approach contingencies other than mortality. My own preferred approach is to start with tables A-D, making such adjustments as are necessary on the basis of the points in note 30. That is at least quasi-scientific. On a rough and ready basis discounts are rarely under 10%, and rarely over 20% (the upper end being for a young claimant in a risky job with limited promotion opportunities). There are times when, as a matter of strategy, it is better not to use the Ogden approach. Annual loss multiplicand 13. This is the difference between annual net income but for the accident and given the accident. Subject to chance of promotion and wage rises between retirement and trial, the pensionable earnings for C s job at the date of the accident are used on both sides of the equation. Annual loss calculation 14. Thus the calculation is annual loss (at present day values) x unadjusted multiplier from tables x contingency discount. Lost lump sum 15. The lump sum is typically 3 times annual pension and is paid tax free. The easiest way to calculate the loss is to calculate the gross annual pension difference and multiply it by 3. Care is needed with deductions (see below). Evidence 16. Ask the employer s pension department:- (i) The date of retirement and entitlement to pension and/or lump sum based on that (early) retirement. (ii) How much was in fact paid by way of lump sum, and how much has being (and is being) paid as pension. 7

8 (iii) (iv) (v) It if was not paid, but was frozen until normal retirement, what is the projected level of pension at retirement age (lump sum and annual pension). If the employee had worked through to normal retirement, what would the pension level have been (lump sum and annual pension). For a copy of scheme rules/ booklet. [You need to know how the scheme works, particularly what pensionable pay is and how that is applied to calculate pension entitlement.] Scheme rules are often available online. WIDOW S PENSIONS 17. Many schemes provide for a widow s pension as a proportion of the claimant s pension after his death. That is simply tacked on to the end of the pension loss claim by reference to the widow s life-time multiplier (Ogden table 2) (insofar as it exceeds the claimant s life-time multiplier). An alternative approach is in note 25 to the Ogden tables. ADDITIONAL VOLUNTARY CONTRIBUTIONS 18. In any occupational scheme (final salary or money purchase), the scheme might allow AVCs to be made by the employee. This is of greatest significance in matching AVC schemes:- i.e. if an employee contributes x by way of AVC, the employer will match it. Such matching AVCs can be dealt with as with money purchase contributions:- claim the sum which the employer would have contributed but for the accident (and don t forget to add back any AVCs deducted to reach net pay for the loss of earnings claim). STATE PENSIONS 19. It is rare to see a claim for loss of basic state pension. The pension is paid if C is on benefits regardless of whether or not C has accrued the full 30 years contributions. It is feasible that a loss will need to be explored on 8

9 the same basis as above (and it is normal to explore this in fatal accident claims for working out dependency). 20. The tax office can provide forecasts for state second pension (S2P) where relevant. DEDUCTIONS 21. Deduction of collateral benefits justifies a talk of its own. It would not be a complete talk on pension loss, however, without observing that if a pension is received early as a result of an accident, it is not deducted from loss of earnings in the time up to retirement (if the accident had not happened), but it is thereafter deducted from the pension loss claim. The easiest was to conceptualise this is that one has to deduct like for like (so pension is not deducted from loss of earnings, but pension is deducted from pension). Parry v Cleaver [1970] AC 1. I have doubts about the logic which has led the House of Lords to apply the rules as they are applied, but it is best not to get me started on that. 22. The application of deductions to a lost lump sum is awkward (but straightforward once you have got the hang of it). Remember that C does not have to give credit for ill health pension received before his intended retirement date; it s the same point in principle. The lump sum (typically 3 times annual pension) represents a commuted 5 sum in respect of the whole pension. Part of it represents commutation of pension which (but for the accident) would have been pre-retirement:- that part need not be brought into account. The rest of it (which represents the period after normal retirement age) does have to be brought into account. This is most easily illustrated with an example. Male aged 44 at injury, intended to retire at 65. Lump sum which would have been received but for accident 29,061 Lump sum which has been received 19 years early 11,250 5 exchanged 9

10 Lost lump sum is 29,061 Discounted for accelerated receipt (19 years early) 18,303 6 Discount for mortality [not done here for simplicity] Give credit for 11,250 x = ( 3,938) Thus loss 14,365 It should be noted that the above calculation gives credit for the postintended retirement proportion of the period from actual retirement to death (and it does not give credit for the period from actual to intended retirement. 23. If C moves to new employment with a new pension entitlement, credit needs to be given for that. RECENT(ISH) CHANGES 24. The Pensions Act 2007 has raised state pension age. See above. 25. The Pensions Act 2008 requires employers to provide pension schemes to all employees between 22 and state pension age earning above the income tax personal allowance. Such employees who are not already in a qualifying pension scheme will be automatically enrolled in an employer s scheme (and whilst they can opt out, they are automatically re-enrolled every 3 years; opting out seems to me to be unlikely to be common). In very simple terms, under such a scheme an employer will be obliged to pay at least 3% of qualifying earnings into the scheme to supplement 4% payable by the employee and 1% tax benefits effectively contributed by the government. On this basis a claimant can look to claim at least 4% of gross salary as a loss of pension claim. The correct multiplier will be the ordinary working life multiplier (with appropriate Ogden discounts). 6 Using table x 29, Pension loss multiplier from table Loss for life multiplier from same age table 1. 10

11 26. Irritatingly for the purposes of calculations, the Pensions Act 2008 will be phased in. It is expected that from 1/10/12, employers with a PAYE size of over 120,000 will have to make the 3% contribution. There is then a staggeringly tedious tapering to show when smaller employers have to make the contribution. It is summarised at:- plementation%20dates%20-%20dwp%20version.pdf SUMMARY OF ESSENTIAL CASE LAW BTC v. Gourley [1956] AC 185. Pension loss calculations should be carried out net of tax (as with loss of earnings). Parry v. Cleaver [1970 AC 1. No credit to be given against loss of earnings for pension received early as a result of the accident. (Longden v. British Coal Corp [1998] AC 653 applied the same approach to lump sum losses; only the proportion of commutation which related to post-normal retirement pension is off-set when considering lost lump sum). Auty v. National Coal Board [1985]1 WLR 784. Calculated defined benefit pension losses using multiplier/ multiplicand discounted for contingencies other than mortality. (Contingency discount later reduced in Page v. Sheerness Steel [1998]3 All ER 481). Langford v. Hebran [2001] EWCA Civ 361. Examine the chances of promotion options and calculate loss on a loss of a chance basis. St John's Chambers, 101 Victoria Street, Bristol, BS1 6PU. 17 June 2011 MATTHEW WHITE 11