Pension loss calculations in disease claims

In May 2007 the 6th edition of The Ogden Tables was published which fundamentally altered the methodology for the calculation of future loss of earnings. The impact upon pension loss claims was far more subtle and consisted only of alterations to the multipliers to be adopted when calculating the same. This was due to a revision of life expectancy in the population as a whole following predictions based upon the findings of the 2004 National Census. Ogden 6 confirms "increased multipliers with most effect on multipliers at younger ages for loss of pension".

In fact the increase in the multipliers for, say a male with a pension loss commencing at age 65 years ranges from 11.82% (for a male aged 40 years at the date of trial) falling to 2.4% (for a male aged 50 at date of trial) and thereafter to nil by age 65.

We are all probably quite familiar with calculating loss of pension in the context of "lost year claims" and claims for dependency in Fatal Accident Act matters and as such these present few practical difficulties.

What are encountered less frequently are those situations where an individual loses pension rights during their working life and it is upon these situations which this article intends to shed some light.

At its simplest is the situation where a person suffers a reduction in future likely pension payments, either due to loss of the pensionable employment or because their contributions to the scheme are reduced due to a reduction in earnings caused by the Defendant’s breach of duty, but where the Claimant concerned does not receive any ill health early retirement pension.

Most pensions have 2 components; firstly the possibility of drawing down part of the "fund" upon retirement as tax free cash (typically up to 25% of the fund) with a corresponding abatement of the annual payments; secondly an annual payment (paid monthly or weekly) for the life of the scheme member. There might also be a widow’s pension and death in service benefits. It is important to remember that tax is payable on annual pension receipts although whether this will impact on actual receipts will depend upon the Claimant’s total annual income and age (as personal allowances increase with age).

In this scenario the loss calculation is reasonably straightforward. Once the pension scheme administrators have confirmed the lump sum and annual pension which the claimant would have enjoyed but for the accident and that which he is now likely to receive the calculations can commence.

The Claimant will receive the difference between the lump sum which he would have received but for the Defendant’s breach of duty and that which he will now receive at retirement. This must be reduced to reflect accelerated receipt using Table 27. This takes account of the fact that a claimant could invest the monies awarded to him with an assumed rate of return of 2.5% per annum. For example, the discounting factor for 10 years at 2.5% pa return is 0.7812.

The annual loss is then multiplied by the appropriate multiplier to calculate the lifetime loss of annual pension payments and that, added to the lump sum is the pension loss.

Thus for example a 40 year old claimant would have retired at age 65 with a lump sum of £20,000 and an annual pension of £7,500. He will now receive a lump sum of £10,000 and an annual pension of £4,000.

His lump sum loss is £10,000, which must be reduced by a discounting factor of 0.5394 to reflect 25 years accelerated receipt. His loss is £10,000 x 0.5394 = £5,394.

In addition, his annual loss is £3500. The multiplier is set out in Table 21 and is 7.78 years. Thus £3,500 x 7.78 = £27,230. His total pension loss is therefore £5,394 + £27,230, a total of £32,624.00.

More complex are those cases where the Claimant is a member of a pension scheme which provides ill health early retirement/ disability pensions. Parry v Cleaver [1970] AC 1 decided that the ill health pension payments received by the claimant prior to his normal retirement date cannot be set off against any loss of wages claim. After his "normal" retirement date (ie the date upon which he would have retired if he had not been injured) then the receipts can be set off against the annual payments that the Claimant ought to have received, to create a net loss figure to be multiplied by the relevant multiplier as set out above.

The complexity arises in the treatment of any lump sum paid to the Claimant early. Typically, these schemes allow a claimant to retire immediately, generally with an enhancement of actual years served. The claimant can elect to take part of his fund by way of lump sum immediately (with a corresponding reduction in annual pension payments). Although the pre retirement annual payments cannot be deducted from the pension loss claim, part of the lump sum can.

The methodology for calculating the same was set out in the case of Longden v British Coal Corporation [1997] UKHL 52. In order to determine the amount of the lump sum, received early which can be set off against the pension claim one must calculate the multipliers for the claimant to his normal retirement age and for his full life (ignoring any reduction in life expectancy arising as a result of the Defendant’s breach of duty). The difference between these 2 multipliers represents the post retirement multiplier. The post retirement multiplier is divided by the full life multiplier and multiplied by 100 to calculate the % deduction. Additionally, in order to compare like with like the retirement lump sum must be ascribed a current day value, by reducing it to reflect accelerated receipt using Table 27.

Thus a claimant retires aged 40 years and receives a lump sum of £10,000. But for the accident he would have retired at aged 65 and received £20,000. He now receives an ill health pension of £4,000 and will receive a retirement pension of £7,500 at age 65.

Thus:

Discount factor for accelerated receipt of lump sum (25 years, 2.5%, Table 27) 0.5394

Present value of expected lump sum is £20,000 x 0.5394 = £10,788

Life multiplier at receipt of lump sum 25.79

Multiplier to retirement at receipt of lump sum 18.01

"Longden" factor (25.79 – 18.01) / 25.79 = 0.3017

Lump sum loss is £10788 – ( £10,000 x 0.3017) = £7,771

Therefore present value of the lump sum loss is 7771 x 0.5394 = £4,191.68

Annual pension loss is £3500

Pension multiplier is life multiplier – multiplier to retirement

Ie 25.79 – 18.01 = 7.78 (as previous calculation)

Total annual loss is £3,500 x 7.78 = £27,230

Total pension loss is £27,230 + £4,191.68 = £31,421.68

Thankfully, the incidence of claims involving these sorts of calculations in disease claims is low and likely to decrease as expensive final salary pension schemes are closed to new entrants and phased out by overhead conscious employers. The corollary of the lack of practise in dealing with these may well be a certain amount of head scratching particularly where a claim is badly pleaded by a Claimant.

Paul Debney, Partner, Weightmans LLP