Pension rights on dismissal

Your pension rights are likely to be found in a number of documents, including those below.

• Your service contract: this should refer to any pension arrangement to which your employer will make contributions. If the arrangement is a personal pension plan or a stakeholder scheme, it will typically give details of the pension provider and the level of contributions. If your company has an occupational scheme, the service contract will probably refer to the pension scheme booklet, where more detailed information can be found. Usually, the contract will give your employer the right to change the pension scheme, either expressly or by invoking the power of amendment in the pension scheme.
• The pension scheme booklet: the trustees of any occupational pension scheme are required by law to give you certain details about the scheme. These include an outline of how to join, the benefits available, how much you will need to contribute and how to make a complaint.

If you are made redundant or are asked to leave your company you may be entitled to compensation. Your rights will depend on the circumstances and what your service agreement says. (See our series of guides on Directors' service contracts.) You should always seek legal advice.

In summary, you are entitled to be put back into the position you would have been in had your service agreement been properly complied with. So, if you’re above the minimum retirement age you may be retiring on pension.

If you’re a member of a personal pension, stakeholder or defined contribution scheme you should be entitled to compensation for lost pension contributions during any period of notice. This loss will be reduced to reflect the fact that you’ll be receiving the contributions as a single lump sum rather than over a period of time.

If you’re a member of a defined benefit scheme the position is more complicated. To calculate your pension loss, you need to look at your pension rights at the date you leave and the pension rights you would have had at the end of your notice period. The difference is the pension loss. An actuary will have to calculate the value of this difference, unless you’re offered an additional period of service in the pension scheme to cover the notice period. Several factors will need to be taken into account. They include:

• any pay rises you might have been entitled to during your notice period;
• the fact that you are being paid the money before you would have been entitled to it;
• any new job you may get, as this is likely to offer some form of pension;
• any contributions that you would have had to make during the notice period.

If you’re entitled to a pension when you leave employment, your employer is not allowed to take any pension benefits that you receive during your notice period into account when calculating compensation for the loss of your job. This is the case even if you receive an enhanced pension under the scheme rules on dismissal or redundancy. What’s more, if your pension at the end of your notice period is less than it would have been had you been allowed to serve out your notice, you may claim for pension loss without any adjustment for the pension payments you receive in the meantime.

The following case helps to explain these rules.

Clark v BET

John Clark was the chief executive and managing director of the facilities management company BET. He had a three-year notice period.

In 1996, BET was taken over by rival company Rentokil, and the 55-year-old Clark was fired without notice – ie wrongfully dismissed. Clark sued BET for damages.

A provision in Clark’s defined benefit pension scheme allowed him to take immediate retirement on an unreduced pension if he were made redundant after a takeover. This meant Clark’s pension rights at 55 were more valuable than they would have been if he had retired at the end of his notice period. (Usually, pensions are reduced to take account of early payment.)

Clark was entitled to receive the pension unreduced at 55. His compensation award was not lowered to take this increased pension into account. He was also entitled to claim for pension loss. The pension loss alone was worth £550,000.