Pension loss: a very brief introduction

December 3, 2024

by Chris Richards

Introduction

This article is going to provide a very brief introduction to the world of pension loss.

In the world of personal injury law, we often deal with things that are easy – for example, calculating a simple loss of earnings over a short period of time. We sometimes deal with things which are a bit harder – for example, the approach to loss of earnings where due to an accident the Claimant is now under a disability. However, we sometimes have to bite the bullet and deal with things which are nasty. Pension loss, unfortunately, is one of them.

I would like to express my thanks to Chris Barnes KC who was very helpful when this article was being put together. Nonetheless, any errors are my own.

Why is pension loss important?

It might be tempting to ignore pension loss and hope that it goes away. However, any claim which involves a meaningful claim for loss of earnings, with no corresponding claim for loss of pension, is a juicy target for professional negligence lawyers. Wherever there is a meaningful claim for loss of earnings, there is likely to be a meaningful claim for pension loss. You need to be able to sniff it out before someone else does.

Disclaimer

This article is meant to be a helpful introduction to the subject and is not advice to be relied upon. The law changes all the time and the facts of every case are different.

This warning is particularly important given that pension loss is an area where not all of the main principles are settled. There are still differences of opinion about how to deal with certain aspects of the calculation (e.g. accounting for contingencies).

Also – this article is purposefully incomplete. We cannot cover every area. Some of the topics discussed in this article are intentionally simplified.

If any solicitors reading this would like some advice, please feel free to contact my clerks.

What are some initial questions to think about?

A client comes to you who has lost some earnings (whether in the past or the future). They may have lost some pension as well.

There are some questions which immediately come to mind:

Does the Claimant have a personal pension? (although this is likely to be irrelevant, as we will explain below)
Does the Claimant have an occupational pension?
If they have an occupational pension, what type of pension is it? (defined benefit / defined contribution)
Can they provide you with any documents for the pensions? (plans / statements of fund value etc.)
If there is no pension at the moment, would the Claimant (absent the injury) have expected to obtain a pension in the future?

There are some further questions which are more about the Claimant:

When would the Claimant have retired absent the injury?
When are they now expected to retire?
What was the employment history of the Claimant before the injury? (continuous / disrupted)
If the injury had not happened, how would their career have played out? (including promotions, changes in hours etc.)
What is their career looking like now?
What was the health of the Claimant before the injury? (good health / poor health)

If you are handing off the pension loss calculation to counsel, or an expert, they will need the above questions answering otherwise they will either not be able to advise, or will provide an incomplete advice, or will otherwise do a bad job.

Are we looking at a loss of pension, or a loss of income?

We are going to encounter two types of loss in this article, and it is important to distinguish them.

Pension loss means someone having a reduced pension in the future. When it pays out, their pension is going to pay them less. You are going to try and work out how much the reduction will be. The reduction in the pension is the loss.

What you might have is something that looks more like a reduction in income. This is where the loss is being suffered now, rather than in the future. If a person is earning less, and is able to divert less of their income into the pension, you may be needing to calculate the extent to which the pension contributions have dropped now, rather than the extent to which the pension payments will drop in the future.

This is important because sometimes, as you will see, the loss which can be recovered is actually a loss of income rather than a loss of pension.

What are the different types of pension?

There are three main types of pension.

The first type of pension is the state pension. This is the pension which the vast majority of people will receive from the government when they reach pensionable age.

The second type of pension is a personal pension (invariably defined contribution).

There are two other types of pension which are occupational in nature (i.e. related to the person’s work):

A defined benefit scheme
A defined contribution scheme.

The first main type of pension – the state pension

What is the state pension?

As I mentioned above, the state pension is something which is received by the vast majority of people when they reach pensionable age.

The age on which the pension starts to be paid depends on the date when someone was born. This can be easily checked using the government website:

https://www.gov.uk/state-pension-age

I was born in 1991, and so I will have to wait until the age of 68 to receive my state pension.

For the 2024/2025 year, the full rate of the state pension is £221.20 a week. It is important to remember that this figure may well increase over time. The courts will be open to the idea (when calculating future entitlement) that this figure may increase.

Where does the right to be paid a state pension come from?

The right to be paid a state pension (and indeed, the right to receive the full state pension) depends on the period of time that you have been:

Working for an employer and paying National Insurance (where earning more than £242 per week);
Working for an employer and getting National Insurance credits (where earning between £123 and £242 per week);
Being self-employed and paying National Insurance Contributions;
Receiving certain benefits (e.g. Jobseeker’s Allowance or Employment and Support Allowance).

You will generally receive the full state pension if you have 35 qualifying years.

You will generally receive part of the state pension if you have 10 qualifying years.

Why is this important for our purposes?

If the Claimant’s career ends up being shortened by their injury, there is a possibility that the qualifying years that they will build up will be reduced to the point where it starts to affect their entitlement to state pension.

There may not be a linear relationship between the effect of the accident on the career, and the effect of the accident on the state pension:

If the qualifying years are reduced by a single year, from 35 to 34, the Claimant may suddenly lose their right to a full state pension;
If the qualifying years are reduced by 10 years, from 45 to 35, there may be no effect given that the Claimant still remains entitled to the full state pension.

The starting point is therefore to compare the following:

The qualifying years which would have been accumulated but for the injury;
The qualifying years which are now going to be accumulated.

If there is a drop in the state pension entitlement, in theory, that loss can be claimed for each year of the Claimant’s remaining life expectancy.

However – it is possible to pay the government money to effectively ‘top up’ the entitlement to the state pension. The process is set out here:

https://www.gov.uk/voluntary-national-insurance-contributions

It may be the case that where the loss of state pension is large, it will be cheaper to simply pay to top up the entitlement to the state pension, and this is what should be claimed.

Before we go further – the two components of a personal/occupational pension

We are going to be looking shortly at the kinds of pension other than the state pension. These include a personal pension (invariably a defined contribution scheme), and an occupational pension (which can be defined contribution or defined benefit).

There are usually two components to pensions like these:

The lump sum paid upon retirement (usually up to 25%, and tax-free);
The annual payments which follow from retirement onwards.

There is usually a relationship between the lump sum and the annual payments. If the lump sum is increased, the annual payments will usually be decreased.

The second main type of pension – a personal defined contribution scheme

Before we go any further – the idea of a defined contribution pension

A defined contribution pension is simply one where there is a ‘defined contribution’ of money going into the pension. The entitlement to pension income depends on what was originally put in. The more you get in, the more you get out. The money is typically invested and the return determines your pension entitlement.

We are going to see two types of defined contribution pensions:

The defined contribution pension which is personal in nature;
The defined contribution pension which is occupational in nature;

A defined contribution pension which is personal in nature is simply one which the individual person has chosen to set up and pay into themselves.

A defined contribution pension which is occupational in nature is one which the employer, and potentially also the employee, are paying into.

Will there be any loss of pension for a personal defined contribution scheme?

There will usually not be any loss of pension associated with a personal defined contribution scheme.

The logic behind this proposition is as follows. The money that you put into the pension comes from your income. What you are doing is investing your income. If you have less income to invest, that is the loss. Trying to predict what might happen to that money once you have invested it is virtually impossible, and any losses will be too remote. It is said as follows in the current edition of Facts and Figures:

“[L]oss of investment opportunity remains irrecoverable as too remote in law even if a court could be persuaded the investment would have been proﬁtable”. [page 306]

You may encounter pensions ‘experts’ who will say that they can calculate a loss of pension, based on how the fund would have performed in the future, but this is not persuasive.

So, here, there is usually no loss of pension. If there is less income being generated which can be put into the pension, that will be the loss.

What about the loss of tax relief?

There may be a loss of tax relief, given that the money paid into the pension will be partly shielded against tax. I think the idea is that the injured Claimant, through being able to put less money into their pension, loses the ability to shield part of their income from tax. The loss of income is magnified by the loss of tax relief. However, there will only be a loss of tax relief if the Claimant, when they are paid damages to cover their loss of income, cannot then go and obtain the same tax relief elsewhere. If the same tax relief can be obtained, when the Claimant is paid their damages, it may be the case that there is no loss. That said, high earners may not be able to access the same level of tax relief through outside investments, and there may well be a loss suffered.

I tend to think loss of tax relief is the sort of thing where an expert may be needed.

The third type of pension – an occupational defined contribution scheme

You can also have a defined contribution scheme that is associated with employment. This is the most common form of pension nowadays.

The pension is almost invariably contributed to by the employee and the employer (and also the government). The employee will contribute a certain percentage of their gross earnings (usually 5%). The employer will then contribute a further percentage (which according to the Pensions Act 2008 must be 3% of earnings above a given threshold – usually £6,240). The government also contributes through granting tax relief on the contributions being made by the employee.

Because this is a defined contribution scheme, if the contributions drop, there is usually no loss of pension. We are not claiming for a lower pension in the future – the loss is being suffered now. If the contributions (whether from the employer or the employee) are reduced, that is the loss.

However – there are some things to remember.

A trap for the unwary – calculating loss of earnings using net earnings

If you are calculating loss of earnings, the usual starting point is to look at the net earnings. The loss of net earnings is the loss that will actually hit the Claimant in the pocket.

However, the figure for the net earnings is calculated after any deductions are made for pension contributions. If the net earnings have reduced, there may be a further loss of earnings, in the sense that the earnings going into the pension have also reduced.

You may need to account for both elements when calculating the loss of earnings.

The possibility of there being an additional claim for the loss of tax relief

There may be again a loss of tax relief, given that money paid into the pension by the employer and employee will be at least partly shielded against tax. It is possible that when the Claimant receives damages for the lost contributions, they will be able to put them in an investment which will give them similar shielding against tax, but this is not guaranteed.

The loss of tax relief is again the sort of thing where an expert may be needed.

The fourth main type of pension – an occupational defined benefit scheme

I am sorry to say that this is where things get complicated (or more complicated…)

What is a defined benefit scheme?

The idea behind a defined benefit scheme is that the actual value of the pension to the employee is calculated using a formula which is written into the scheme. The formula usually depends on their length of service, and their earnings. The value does not depend on how much money was physically paid in (as in a defined contribution scheme).

The terms of the scheme are crucial. As an example, the pensionable earnings, under the terms of the given scheme, can sometimes be different to the actual earnings. You need to get hold of the terms of the scheme to have any idea what the loss will be.

There are usually two main types of defined benefit pension:

A final salary pension, where the value of the pension is influenced by the amount that the employee is earning at the time they stop working;
A career average pension, where the value of the pension is influenced by an average of the salary throughout the career (sometimes referred to as ‘CARE’, which stands for ‘Career Average Revalued Earnings’).

Defined benefit schemes are usually worth a lot more than defined contribution schemes and are most often encountered with public sector organisations.

Where does the loss of pension come from?

We mentioned above that there are usually two components to a non-state pension – the lump sum, and the annual payment. The loss of pension also has two components:

The reduction of the lump sum paid upon retirement;
The reduction of the annual payments which follow from retirement onwards.

How do you calculate the loss of pension?

Get an expert! No, Chris, wrong answer! (at least, some of the time).

In all seriousness, you cannot blindly rely on an expert. I have seen some very poor reports from ‘pension loss experts’. You need to be able to spot errors when they arise. This means being able to do at least most of the pension loss calculation yourself.

Working out the loss of pension where there is a defined benefit scheme means looking at the terms of the scheme to see how the injury has changed the overall entitlement.

You will end up having to calculate what the pension entitlement would have been absent the injury, and then compare this to the pension entitlement which the Claimant now has as a result of the injury. You deduct what they now have (a smaller figure), from what they would have had (a larger figure), and there is the loss.

I find that the pension provider will sometimes carry out this calculation for you if you ask them to. You will need to tell them what effect the injury has had. This will provide you with a fairly rough and ready idea of the loss of pension. However, there are some further adjustments which need to be made and these are discussed below.

Is it just the Claimant who will be receiving the pension?

There are many pension schemes which allow the annual payments to continue to be paid (in whole or part) to the spouse even after the employee has died. You will have to bear in mind that the life expectancy of the Claimant may not be the end of the period during which the annual payments are being paid. If the life expectancy of the spouse is longer, you may need to try and calculate the pension loss over a longer period (subject to any discounting if the spouse is only entitled to receive a certain part of the pension).

The adjustment for accelerated receipt

We also need to bear in mind that the injured Claimant is not receiving their full pension entitlement gradually over the course of their life. They are getting their damages (representing the lost annual payments) in their hand now. The Claimant might also be receiving the lump sum earlier than they otherwise would have.

The sums awarded therefore need to be adjusted for accelerated receipt. The easiest and most reliable way to do this is to use the Ogden tables. The tables for pension loss in the Ogden tables account for accelerated receipt.

The adjustment for contingencies (in general)

If we calculate the notional loss of pension, and award the Claimant damages in the same figure, this may well overcompensate them. Why might this be?

The reasoning behind this is as follows. There is no guarantee that the Claimant, if they had not been injured, would have kept working up to their intended retirement date. There is a risk of the Claimant suffering redundancy, dismissal, ill-health, disablement, or even death. If any of these things happen, the Claimant would either not recover a pension, or would only recover a reduced pension. If we were to blindly assume that the uninjured Claimant would have accumulated the theoretical maximum entitlement, this may not be accurate, and we may end up exaggerating the claim for pension loss.

The way that this used to be dealt with was to reduce the claim for loss of pension in a fairly unscientific, broad-brush way. The case of Auty v National Coal Board [1985] 1 W.L.R. 784 is authority for this proposition. The discount where the Auty approach is being used tends to be around 10% to 20%.

When considering the extent of an Auty reduction, one should have the following in mind:

The work history of the Claimant (breaks in employment, changes in role, changes in employer etc.);
The health of the Claimant before the accident;
The chance of the Claimant advancing in their job, or indeed losing it.

However, there is a suggestion in the literature that this approach may not be appropriate any longer. The current edition of Facts and Figures talks about the “[f]ormal demise of the Auty discount”. It can be quite hard to work out why the Auty approach is being rejected. None of the practitioner texts make this clear, which is a shame.

Doing the best I can, there appear to be three main reasons why the Auty approach is being rejected.

The first reason is that defined benefit pensions (where the Auty approach is relevant) are dying out. The vast majority of private sector pensions are now defined contribution pensions. This means that the Auty approach is simply used less often in practice.

The second reason is that many of the defined benefit pensions which exist involve military pensions. These have an almost bespoke approach which involves using statistics generated by armed forces agencies (e.g. Defence Analytical Services & Advice) to work out the pension entitlement given the differing years of service, the chance of promotion and so on (see Brown v Ministry of Defence [2006] EWCA Civ 546). The approach to military pensions is well outside the scope of this article.

The third reason is that we can actually tweak the pension calculations nowadays to account for different retirement ages. As I understand it, the calculation for pension loss in Auty assumed that the pension was being taken from the age of 65. The discount accounted for the possibility that the Claimant (even for reasons unconnected with the injury) would have not been able to continue working (in whole or part) until the age of 65. However, we can now create bespoke calculations to work out the pension loss for particular retirement ages. If the Claimant was likely to have retired at an earlier age, absent the accident, we can factor this into the calculation and reduce the claim for pension loss.

See the commentary in the current edition of Facts and Figures:

“If a balanced ﬁnding is made as to the fair assumption for age at retirement, a bespoke calculation can be done that balances the main ﬁnancial contingencies automatically.” [page 311]

“The downward adjustment in Auty from the initially calculated ﬁgure was no more than an exercise in the conventional approach to reach a balanced award for a future loss. Since the initial calculation was not based on a balanced assumption at all but taken at full NPA, there had to be a signiﬁcant reduction.” [page 312]

The adjustment for contingencies (using Tables A to D)

There is another point to mention – another way of accounting for contingencies.

The introductory notes to the Ogden Tables include a sample pension calculation for a defined benefit pension. You will see a modified and reworded version of this below. We know that the number of years that the Claimant continues working will a bearing on the pension entitlement. The sample calculation in the Ogden Tables adjusts the number of years that the Claimant would have worked, absent the accident, by the adjustment factors in Tables A to D. The adjustment factors in Tables A to D effectively assume that a person will not earn 100% of their expected income due to the sort of contingencies we discussed above. If Tables A to D are used to calculate the expected length of employment, absent the accident, this is another way of taking into account the effect of contingencies.

What if the Claimant starts to receive their pension early?

We talked above about the approach when trying to calculate pension loss. If we assume (for now) that we have a Claimant is still retiring at the same age, we can look forward and compare the pension that they would have received (lump sum and annual payment), to the pension that they are now going to receive. You compare the two and calculate the loss. The pension they will now receive is deducted from the pension they would have received.

But what if the injury has resulted in the Claimant starting to receive their pension earlier than they otherwise would have? The lump sum and the annual payment may have reduced, but the Claimant is going to be receiving the pension for longer. Also, if the pension has started to be paid before the intended retirement date, the Claimant might be claiming loss of earnings for the same period, and there might be double recovery.

The first question is whether the Claimant needs to offset the annual payments paid before the intended retirement date from any loss of earnings which is claimed up to the intended retirement date. The answer is no – see Parry v Cleaver [1970] AC 1.

The second question is whether the Claimant needs to offset the annual payments paid before the intended retirement date from the overall award of pension loss. The answer is no – see Longden v British Coal Corporation [1991] 2 WLR 1052.

As I understand it, you effectively pretend that the Claimant has not been paid the annual payments which they have received before the intended retirement date.

The third question is how the lump sum should be treated. The lump sum effectively represents the annual payments extending into the future being reduced to contribute to a single lump sum which is paid upon retirement. There may be a part of the lump sum which reflects annual payments being paid before the intended retirement date (that is, the date that the Claimant would have retired absent the accident), and a part which reflects annual payments being paid after the intended retirement date.

Again, you effectively pretend that the Claimant has not been paid the part of the lump sum which reflects annual payments being paid before the intended retirement date – see again Longden v British Coal Corporation [1991] 2 WLR 1052.

Everything that I have written above is prefaced with ‘in my understanding…’. This is one of the most technical and difficult topics that any personal injury lawyer is likely to deal with.

What if there are too many imponderables?

If you cannot calculate the pension loss precisely using the methods set out above, due to there being too many imponderables, you can legitimately consider adopting a broad-brush approach and asking the court for a lump sum. However, this is the last resort.

An example is Van Wees v (1) Karkour & (2) Walsh [2007] EWHC 165 (QB), where the Claimant ended up getting a chunky lump sum of £100,000 for their pension loss.

The two worked examples

The introductory notes to the Ogden tables include worked examples for the following two types of pension:

An occupational defined contribution pension;
An occupational defined benefit pension.

The introductory notes to the Ogden tables make clear that these calculations are intended to be approximate. It is a bit troubling that a reference text as important as the Ogden tables cannot tell you for sure whether the figures are correct or not!

The calculations also assume that the discount rate is -0.25%. I am aware that the discount rate will change shortly. However, I am not going to fiddle with the calculations for the purposes of this article. I want to make sure that the calculations effectively reproduce what is written in the introductory notes (so that readers can compare them together).

The first worked example – an occupational defined contribution pension

The Claimant is a degree-educated women aged 35.

Before the accident, she was earning £40,000 gross and her employer was making 3% contributions to her pension.

The Claimant has now moved to a lesser role, earning £20,000 gross, and is considered ‘disabled’.

The introductory notes to the Ogden tables say that the following is a “simplistic” way of calculating her loss of pension. However, you should bear the following in mind:

Given that this is a defined contribution pension, the loss being calculated is more a loss of income than a loss of pension;
The calculations for some reason only consider the contributions from the employer. The injury may also have had an effect on the contributions from the employee, and the tax relief granted by the government.

The employer’s pension contributions but for the accident would be:

(£40,000 − £6,240) × 3% = £1,013 per year

The employer’s pension contributions because of the accident will now be:

(£20,000 − £6,240) × 3% = £413 per year

The multiplier with reference to the State Pension Age of 68 is 33.59 (Table 12)

The introductory notes to the Ogden tables then use Tables A to D to adjust the multiplier for contingencies other than mortality.

The adjustment to the multiplier for the figures but for the accident are as follows:

The adjustment factor: 0.88 (Table C, Employed, Level 3)
The adjusted multiplier: 33.59 * 0.88 = 29.56

The adjustment to the multiplier for the figures because of the accident are as follows:

The adjustment factor: 0.59 (Table D, Employed, Level 3)
The adjusted multiplier: 33.59 × 0.59 = 19.82

We then end up with a pension loss of (£1,013 × 29.56) − (£413 × 19.82) = £21,759.

The second worked example – an occupational defined benefit pension

The Claimant is a man and before the accident was a member of the Local Government Pension Scheme accruing a pension of 1/49th of pay each year. The pension would be payable from the age of 67, which would be his state pension age.

The Claimant was earning £30,000 gross. The Claimant intended to retire at the age of 67. However, he ended up leaving employment at the age of 47. He is 50 now. It is not anticipated that he will work again.

The Claimant has therefore lost 3 years of service up to the present day, and 17 years in the future.

The introductory notes to the Ogden tables again use Tables A to D to adjust the multiplier that reflects the future years of service.

We therefore have the 3 years of past service (which are untouched), and the 17 years of future service, which are adjusted by a factor of 0.81 (Table A, Employed, Level 3). The total lost period of service ends up being the following:

3 + (17 × 0.81) = 16.77 years.

The lost pension under the terms of the scheme therefore ends up as 16.77 * (£30,000 / 49) = £10,267 per year.

Don’t forget – these are gross figures and will need to be adjusted for tax.

On retirement, the Claimant could exchange part of his pension for a lump sum. If the Claimant agrees to knock a certain sum off the annual payment, the sum knocked off is multiplied by 12 to give the lump sum.

Let’s assume that the Claimant would have wanted a lump sum. We need to modify the calculation of the lost pension to take this into account.

If the Claimant had chosen to reduce the annual pension by 15%, to generate a lump sum, the lost pension becomes £10,267 * 0.85 = £8,727 per year.

If the Claimant had chosen to reduce the annual pension by 15%, to generate a lump sum, the lost lump sum becomes (£10,267 − £8,727) × 12 = £18,480.

The compensation for the lost lump sum is being received 17 years early and so the discounting factor for a term certain of 17 years would be 1.0435.

The multiplier for pensions payable from age 67 is derived from the Additional Tables. For a 50-year-old male at a -0.25% discount rate:

The multiplier for life is 36.24;
The multiplier to age 67 is 16.71;
The multiplier from age 67 is therefore 36.24 – 16.71 = 19.53.

The pension loss appears to be (£8,727 * 19.53) + (£18,480 * 1.0435) = £189,722.19.

The calculation then assumes that there is a 20% tax rate, and so the above figure is reduced by 20% to produce a final figure of £155,635.

Phew!

When should you consider expert evidence?

You are probably thinking – this all sounds horrible and I would rather not think about it. Can I not just get an expert to do the heavy lifting for me?

This is not a bad idea. It is not necessarily a sign of being lazy (at least, not all the time!). The whole idea of expert evidence is that they will lend a hand where the court, or the parties, cannot make a decision on their own. I am a barrister. I am not an accountant, actuary, or tax adviser. I am not a pensions expert. We can have a go at calculating the pension loss, and with care we should get it right (or only trivially wrong). But should we not be handing this off to someone who is actually an expert?

What do the introductory notes to the Ogden Tables say?

“If pension loss is a signiﬁcant element of an award, consideration should be given to taking advice from an actuary or suitably qualiﬁed forensic accountant.” [paragraph 114]

“Where pension loss is complex, the amounts involved are material in the context of the claim for loss of earnings/beneﬁts/pension as a whole or when dealing with pensions when assessing loss of dependency/support in fatal accident cases, advice should be sought from an actuary or forensic accountant with appropriate experience.” [paragraph 121]

These are nice phrases to include in a directions questionnaire if you want to get an expert on board.

What are the features, in my view, which might justify an expert being involved? Those set out below are those which come immediately to mind:

Is there a defined benefit pension?
Is the pension loss large in the context of the claim?
Is there any issue as to tax relief?

What resources are out there?

This is a very brief introduction. If you would like more information, I can recommend the following:

The introductory notes to the Ogden tables;
The chapter in Facts and Figures dealing with pension loss;
The Employment Tribunals Basic Guide to Compensation for Pension Loss;
The Employment Tribunals Principles for Compensating Pension Loss;
Personal Injury Schedules (4^th edition; sadly outdated);
The PIBA Guide to Pension Loss Calculation.

Conclusion

I hope this article has been helpful.

Chris Richards
Exchange Chambers
November 2024

Back to News