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Pension cost of unfair dismissal

The risk of charities leaving themselves open to high levels of compensation for pension loss in discrimination cases was highlighted by a decision of the Court of Appeal last month.  This is an The risk of charities leaving themselves open to high levels of compensation for pension loss in discrimination cases was highlighted by a decision of the Court of Appeal last month.  This is an important case not just for those (increasingly rare) charities which have kept their final salary schemes open.  It also affects those involved in the provision of services to the public sector where, following the recent reforms, there are likely to be many more charities participating in the centralized public sector schemes, like the NHS Pension Scheme, as well as the Local Government Pension Scheme.

The case (Griffin v Plymouth Hospital NHS Trust) involved a health specialist who claimed constructive dismissal and disability discrimination for her employer failing to make reasonable adjustments to facilitate her return to work.  Discrimination was established at an earlier stage.  The Court of Appeal was asked to consider the appropriate basis for calculating loss in respect of the claimant losing her membership of the NHS Pension Scheme.

Employment Tribunals tend to calculate pension loss, where a claimant was a member of a final salary scheme, using one of two approaches.  The simplified approach calculates loss by reference to the rate of contributions the employer was paying.  It is a rough and ready approach as there is no direct correlation between the rate being paid at any point in time and the actual benefits a member is building up.  It recognizes that the uncertainties of employment in modern economies makes it less appropriate to use a method that assumes, but for the dismissal, the claimant would have remained with her employer in the long term and with access to the pension scheme.  For this reason, Employment Tribunals tend to use the simplified approach for younger claimants and loss is calculated over a relatively short period.

The substantial loss approach attempts a closer estimate based on a calculation of the actual pension likely to have been earned, had the claimant not been dismissed, using actuarial tables.  It is intended for situations where the claimant is likely to have remained with the employer until closer to retirement.  The loss tends to be calculated over a longer period than under the simplified approach and awards tend to be significantly greater.

In this case, the Tribunal adopted the simplified loss approach because the claimant was relatively young (34).  It felt it could not say that the claimant would have remained in the NHS until close to retirement.  The Court of Appeal disagreed.  It placed more weight on the fact that the NHS was the main, if not the only, market for the claimant's specialized skills.  Also, given her disability, she would be more cautious about moving employers.  So the substantial loss approach was more appropriate, notwithstanding the claimant's relatively young age.  The loss should therefore be calculated over the long period from dismissal until close to the claimant's retirement age.

Charities considering entering the market for the provision of services to the public sector should be aware that the pension risks do not end with the payment of the employer contribution rate.  They would be advised to invest in their employment and anti-discrimination policies to minimize the risk of claims that may have a hefty pension price tag attached.

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