Opinion

At B3 -­‐3, and elsewhere in the Home Office Commentary to 1992 SI 129, it states ‘your basic ill health pension is never more than 40/60ths of APP, or what you could have earned by your compulsory retirement age’.

Mr. Burns has asked me to illustrate the steps his pension provider ought to have taken to arrive at his correct ill health pension, instead of wrongly calculating his pension to be what would have been due on taking early retirement by choice.

In overarching principle it has to be always borne in mind that ‘basic’ is not ‘enhanced’ and the sole purpose of the legislation prescribing an ill health pension [B3] is to fully compensate a fireman for financial loss occasioned by injury.

The legislation was framed to provide a firemen with a basic pension, on being retired on account of age. The provision was by way of a Rule B1 pension, limited to 40/60 of a ‘person’s average retirement pay’ [APP].  However, if that purpose is frustrated by an earlier retirement imposed on grounds of ill-health, the purpose becomes one of compensation for the injury suffered, and to compensate for the future financial loss early retirement causes.

Ill-health provision in the SI has 2 components:

• The injury and its sequellae [with which I do not concern myself with here], and

•The financial loss suffered from a loss of future career [my concern here].

Compensation for the financial loss is by way of an index linked Rule B3, ill-health, pension in the amount specified by 1992 SI 129, Part III – Ill-Health Pension.

The amount is to be calculated in two ways, the basis of the first way being that ‘In paragraphs 2 to 4, A is the person’s 'average pensionable pay’.

The SI requires that this calculation be done in any event for a later comparison. Given Mr. Burns’ length of pensionable service, above 10 years, the paragraph 4 formula applies:

7 x A/60 + A x D/60 + 2 x A x E/60.

Where

‘A’ is Mr. Burns’ APP on his retirement in 1997, £35,129.84. ‘D’ is his first 20 pensionable years service, and

‘E’, is his pensionable service in years served in excess of ‘D’. On 33.52 years served, ‘E’ is 13.52.

Thus his ill-health pension ought to have been calculated to be £31,640.28.

This is an enhanced pension seeking to compensate not just for loss of pension, which a Rule B1 would have catered for, but the actual loss in the earnings of a serving officer above pension received for the period, and also the lost pension element attributable to that higher earnings figure, for the final period of service.

The 40/60th rule does not apply to Part III paragraph 4 ill-health pensions because were it to be applied it would avoid the enhancements provided for by the SI. Indeed, it would wrongly substitute, in place of any ill-health pension, the lesser, non, compensatory pension of a person taking early retirement by choice , no future loss/no compensation.

With that calculation done, the provider was then required by paragraph 5 to calculate another pension – a notional pension and then compare it with the paragraph 4 pension (calculated supra).

Why? -­‐ it may be asked -­‐ is a further calculation needed, further to the already enhanced paragraph 4, ill health pension. The question is answered by the purpose of the SI. What it requires the pension provider to discover, in each case of ill-health retirement, is whether or not the paragraph 4 ill-health pensions has been sufficiently enhanced to fully compensate for lost career. If not it is not the pension paid.

To discover this the SI requires the pension provider to decide what Rule B1 pension would that person, now being retired prematurely on ill-health, have been awarded had he served until required to retire on account of age. The SI calls it a notional pension to be calculated and compared with the paragraph 4 ill health pensions. The higher of the two is the correct pension to award (in train with L 4 (3).

Though paragraph 5 (1) (a) specifies a notional pension, what fleshes that out is set out Part VI, Deferred Pension, 2. (2) A person’s notional retirement pension is—

A x E/60 + 2 x A x F/60

Where—

E is the period in years of his notional service up to 20 years, and

F is the period in years by which his notional service exceeds 20 years.

(3) A person’s notional service is the period in years that he would have been entitled to reckon as pensionable service if he had continued to serve until he could—

(a) retire with a maximum ordinary pension (disregarding rule B1 (2)), or

(b) be required to retire on account of age.”

It will immediately be noticed that this formula is precisely the paragraph enhanced 4 formula, save and except that it lacks the first enhancement of A x 7/60. It follows that in every case where ‘A is the APP’ as specified for use in Pt. III, ill-health pensions, paragraphs 2 – 4,  since the Paragraph 4 formula will always be 7 x A/60ths more than the paragraph 5 notional formula, then paragraph 5 is of no legal or any effect. Clearly the SI means what it specifies in limiting ‘A is the APP’ to paragraphs 2 – 4 and making other provision in paragraph 5.

It is for that reason that the word 'notional' is used. The pension provider is required to ‘imagine’ to apply a ‘what if’ solution to the calculation of a 'notional' pension. It does so because the law gives words their ordinary meaning. The OECD defines 'notional' as ‘imaginary, speculatively fanciful’ – which Courts traditionally relied on, but today one can add ‘theoretical, estimated, hypothetical and abstract’ [Word/Tools].

It is not years of pensionable service that the provider is to speculate about, they are fixed for a notional pension. The pension provider to required to ‘speculate fancifully’ about the notional APP. Judges frequently speculate and in the case of paragraph 5 the pension provider is given a judicial role to arrive at a decision as to what ‘could’ the retiree have earnt in future if not denied it by ill-health.

But the pension provider was not being asked to forecast future salary scales. Paragraph 5 anchors the value of yearly increments, and salaries of any future higher rank, to 1997 scales. This is provided for at (2) ‘The notional retirement pension is to be calculated by reference to the person’s actual average pensionable pay’. This is not the same as the stricture to be applied by 1. (2) to paragraphs 2 – 4 where ‘A is the person’s APP’.

The legal effect is to allow the notional paragraph notional APP to be other than the Pt. III paragraph 4 APP.

It follows that if Mr. Burns ‘could’ have been promoted (he was on top increment in his then rank) his notional pension would need to have been re-­‐based onto the 1997 APP of the notional rank reached, on his future notional retirement on account of age.

What is being demanded of the pension provider by the words ‘the notional pension to be calculated by reference to the person’s APP’ is to imagine calculating a Rule B1 pension for Mr. Burns in 1997, but in the rank, or with the number of salary increments he could have earnt over the final 6 or 7 years in his career, but for that career being cut short.

By referencing the notional APP at the date of the ill-health award, crystal ball gazing wondering about inflation et al, is avoided by rooting the APP to the 1997 scales of the notional rank he could have achieved in future, but for termination by ill-health.

The logic is also inescapable that if a projected pension, derived from the projected salary of a higher rank, is advanced into a current pension then would be a duplication of indexed linking over the period of advancement – 6.5 years or so.

Mr Burns’s 1997 paragraph 4 APP would only become appropriate in the case of a notional paragraph 5 pension if he ‘could’ not have advanced – that is if he could only have stood still and earnt no salary increments, nor been promoted. Then his paragraph 4 ‘real’ and 5 ‘notional’ APP would be the same. In that case he would have suffered no future loss on being retired early on grounds of ill-health, if given a correctly calculated paragraph 4, enhanced, pension.

In conclusion of the initial consideration. The SI draws a distinction between a Rule B1 pension, which is APP x 20 + [2 x 5]/60 = 40/60ths, full service reward of those who were retired on account of age, and those who suffered the financial loss of imposed early retirement.

It does so [Pt. III at paragraphs 4 and 5] , firstly, by the enhancement of the Rule B1 formula by an addition to it of 7 x APP/60, and, secondly, by replacing the 5 year limit of years served in excess of 20 to actual years served. So in Mr Burns case the 5 is replaced by 6.76 (33 years 271 days).

Having advanced through the way the SI requires an ill-health to be dealt, I now turn to the what the pension provider ought to have in mind in calculation of the notional pension – a very simple basis Rule B1 pension but taken at point of retirement ‘on account of age’;  one entailing no loss of career or future financial loss.

Had the purpose of the legislation been to limit compensation for future loss to the civil burden of proof by ‘probability’, it could have done so, but instead it chose to specify a pension to be calculated on a notional basis for comparison with a formulaic enhancement to ensure that, if the legislators erred, they did so on the generous side, to be ‘fair', and no doubt to avoid costly and time consuming litigation, and discontent.

Quite how to approach ’notional’ in practice is the work of The Home Office Commentary. It gives specific guidance on what meaning is to be given the SI, in all its parts. In this part, Pt.III paragraph 5, the guidance is that to give proper affect to the word ‘notional’ in arriving at an notional APP, the pension provider has to think of what ‘could’ have been earned. If ‘would’ is substituted it denies the word ‘notional’ any meaning. Nothing is certain so the whole exercise is, of necessity, a work of speculation – as occurs in Court in every loss of earnings case.

‘Could’ is specified, not once but in three places and in different contexts. It is precisely the correct word to reflect the thrust of an SI intended generosity in looking after those whose careers were brought to a premature end, by reason of being injured in protecting the public.

With some 6 or 7 years left to serve until required to retire on account of age, the question is what rank ‘could’ Mr. Burns have notionally reached. It is a question of where his record, experience, calibre and leadership qualities, ‘could’ have placed him at 60 – not ‘probably’ or ‘would’, but ‘could’.

I understand that he had negotiated the Services pay and conditions and distinguished himself abroad. He was the author of the ‘symbols’ international ‘bible’ identifying all that marks devices or containers as noxious and hazardous. But what matters most is where did his peers and principal officers think he could have ended up.

On the evidence to hand, had he remained in service he would have been expected to make SDO with a 1997 APP of £43,894.80 within 3 years and thereafter be further promoted to retire in the rank of ACO with a 1997 APP of £64,533.60 to give him a pension of £43,022.40. That much was, as I understand it , expected of him by others, whose opinion would have mattered in 1997. More a ‘would’ than a ‘could’.

So the question is not so much of would he have become an ACO, but ‘could’ he have become a Deputy Chief Officer on £73,666.45 to retire on a pension of £49,110.97.

I think if that is to become contemplated some analysis demonstrating that within his 3-­‐ year slot on the top of the ‘principle officer conveyor belt’ vacancies would have arisen to admit the notion that he ‘could’ have been so appointed.

Having decided what his notional APP was to be the provider merely has to calculate the notional pension as a Rule B1 pension, but that is, of course, subject to the 40/60ths rule. You can not be compensated for more than you could lose.

What the final stage paragraph 5 calls for is that the paragraph 4 pension be compared with the notional pension and the higher to be paid. But whichever pension is paid what is  finally paid is a notional pension – it is not a time served pension but purely notional, however it is arrived at. It is notional because it is larger than any earnt Rule B1 earnt on time actually served, so it is a pension paid in compensation for a career, which notionally terminated on account of age.

On comparison, if the paragraph 4 ill-health pension is the greater it is subsumed into paragraph 5 to become the notional pension. But if the paragraph 4 ill-health pension is less than the paragraph 5 notional pension, then it does not get subsumed. It does not become the notional pension paid. The paragraph needs to be understood in that context.

This is not in any departure from the thrust of the SI. L 4 (3) makes it clear where there is competition between 2 pensions the higher gets paid. But under the auspices of Pt.III which ever amount comes to be the pension paid, it is paid as a notional pension – since all ill-health pensions are speculative, so notional.

In conclusion on method. The SI requires that the pension that becomes paid as the ill-health pension is the pension that most accurately compensates for a lost career.

In many cases the 7 x A/enhancement will see the comparison resulting in the paragraph 4 calculation becoming the amount paid. But occasionally where ill-health intervened just as a firemen is beginning a new rank with a number of increments to be earnt, year by year, or where in line for promotion(s), then the Paragraph 4 ill-health pension would fail to provide adequate compensation for future financial loss. The notional pension, in taking such matters into consideration, would become the greater in which event the paragraph 4 ill-health pension not being ‘greater’ is not paid.

I can see that it arises from the simple reality that if one has to retire unless very senior at 55 than one cannot serve 40 years. And even if one soldiered on to 60 then, for this generation, where anyone retiring before 2000 would have had to do National Service, again, to serve 40 years would only have been possible on entry into the forces on an 18th birthday, and the Fire Service on a 20th birthday.

Though the Commentary states that the 40/60ths rule applies to Pt. III ill-health pensions it gives no example. The SI does not stipulate that restriction. I think this is because it is an either or position. A paragraph 4 pension is calculated on ‘A is the APP’. That is correct for a ‘by choice’ RuleB1 pension but unarguably too low in compensation for future loss of career unless (if only because on inflation alone) wages and so APP will rise with passage of time.

That rise is taken into account by the enhancement in paragraph 4. But if one is to then apply the 40/60ths B1 rule it avoids the purpose of the SI – as Mr. Burn’s pension provider did.

Given Mr. Burns APP, the paragraph 4 calculation yields £31,640.28. But if the Rule B1 ‘no more 40/60ths of the APP’ rule is applied then the paragraph 4 calculation becomes superfluous since c£35,000 x 40/60 yields c£23,000. Plainly this is not the intention of the SI and to follow the Commentary to this effect was plainly incorrect.

The final matter is one of what interest should be paid by the public authority providing Mr. Burns with an incorrect and insufficient pension.

Under the Late Payment Commercial Debt (Interest) Act 1998, as amended, the interest rate specified is the Bank of England base rate that applies during the period in which the debt falls due plus (+) 8%. The base rate is fixed every 6 months for the purposes of calculating the interest owed.. As the reference rate changes every 6 months you will need to apportion the interest owed where the reference rate changes before the debt is paid.

The case law of Gater Assets v Nak Naftogaz Ukrainiy [2008] EWHC 1108 in which the English Court confirmed that where judgment has been entered in terms of a New York Convention award under s. 101(3) of the Arbitration Act 1996, interest is payable on that judgment even where there is no provision for interest in the underlying award. Although the relevant period and the interest rate are at the discretion of the court, the general approach is to award interest from the date of the judgment and at the prevailing statutory rate (currently 8%)…the award of interest on the judgment, (is) likely to be at the current statutory rate of 8% from the date of the judgment until the date of satisfaction.

The Statutory Rate is Bank + 8%.

Under the 1998 Act, interest is calculated 6 monthly so, in effect, compounded on any change in the Bank of England rate + 8% each 6 months. Not on an annual but half yearly rate basis. The High Court ruling in the Littlewoods Retail v HMRC case, that interest be compounded, (the usual provision) is still in process.

In Enforcement Proceedings the Courts tend leniently to apply 6%.

The authority that where HMRC are indebted to a taxpayer they pay at the 1998 Act rate of 8% currently eludes me but I recollect it to be correct. It is in line with the general thrust.

I would not think a Court of any other authority faced with a pension provider who so failed in their fiduciary duties and were so careless over such a period, and then so reluctant to correct matters, could expect to pay any less than Bank rate + 8% over the period.