Practical Law

How much information or advice should an employer give its employees in connection with their pension rights? A recent determination of the Pensions Ombudsman has given rise to renewed questions about an employer’s obligations in this tricky area. These questions are particularly topical given changes to the pensions tax regime which limit the amount of pensions tax relief available for high earners from 2016/17.

In some pension-related situations, legislation sets out specific rules about the provision of standard-form information to employees. For example, there are detailed requirements about the information that employees need to be told on pension auto-enrolment. And if employers want to make changes to an existing pension scheme, they must consult with employees about the details beforehand. In some circumstances, employers may even offer employees access to regulated financial advice.

Outside these tightly prescribed situations, considerable uncertainties arise. Are employers supposed to warn employees who are members of their occupational or workplace pension scheme about forthcoming tax changes that may affect their retirement plans? What should an employer do if it thinks an employee is making a bad pension-related financial decision?

For employment and pension lawyers, the lodestone is the Court of Appeal decision in Crossley v Faithful and Gould Holdings Ltd [2004] EWCA Civ 293, where the court held there is no implied duty on an employer to take reasonable care of an employee’s economic well-being. The court ruled that the employer was not in breach of contract for failing to advise an employee that his resignation would have a detrimental effect on his entitlement under a permanent health insurance policy.

It could be said that Crossley v Faithful represented an attempt by the courts to draw a line in the sand, following what the Court of Appeal described as an “evolutionary process” at work in previous cases such as the House of Lords decision in Scally and others v Southern Health and Social Services Board and another [1992] 1 AC 294. Scally concerned a group of doctors who were entitled to buy enhanced pension rights under provisions in a collective agreement. They weren’t informed of this right, and so failed to take advantage of it. The House of Lords implied a term into their employment contracts to the effect that the employers were under a duty to take reasonable steps to inform the employees of a contractual term of which they could not have been expected to be aware.

A key point, though, is that the House of Lords made clear this implied term will only arise if a series of conditions are met. To paraphrase, these include requirements that the overall contractual terms have not have been negotiated individually by the employee seeking to rely on them, and that the employee cannot reasonably be expected to be aware of the particular term unless it is drawn to his or her attention.

In the aftermath of Scally, it seemed likely that circumstances where these criteria are met would be fairly uncommon. And so it has proved. In subsequent cases, Scally has been interpreted narrowly and the courts have been reluctant to expand on the situations where an employer is under a duty to warn or give information to employees about pension terms or similar topics. Indeed, in the first instance decision in Crossley v Faithful, Judge Langan QC described Scally as “a bridgehead from which there has been no advance” (paragraph 70).

For example, in University of Nottingham v Eyett and another [1999] ICR 721, the employer failed to advise the employee that his chosen retirement date was financially disadvantageous to him, and that, if he chose to retire the following month, his pension would be calculated at a higher rate. The court found there was no obligation to tell the employee he was making a mistake, and no breach of the implied term of trust and confidence. Although not expressed in this way in the judgment, the upshot of Eyett is that pension scheme members should be assumed to know the contents of the rules governing their scheme.

Despite all this, it could be argued that in some respects these decisions go against the grain. As long ago as 1994, the House of Lords recognised in Spring v Guardian Assurance plc [1995] 2 AC 296 “the changes which have taken place in the employer-employee relationship, with far greater duties imposed on the employer than in the past, whether by statute or by judicial decision, to care for the physical, financial and even psychological welfare of the employee.” (Page 335.)

This state of affairs has been acknowledged in subsequent decisions such as Johnson v Unisys Ltd [2001] UKHL 13, where Lord Hoffmann acknowledged that the law had changed to recognise the “social reality” that “a person’s employment is usually one of the most important things in his or her life” giving “not only a livelihood but an occupation, an identity and a sense of self-esteem.” (Paragraph 35.)

Pensions are central to an employee’s long-term financial future, and it’s only a short extension from the Law Lords’ reasoning to say that an employer owes some sort of obligation to its employees to give them information about factors relevant to their decisions concerning occupational or workplace pensions. After all, the individual would not be a member of the scheme in the first place if he or she were not also an employee.

Two determinations of the Pensions Ombudsman over the past couple of years have highlighted the difficulties in this area of the law, both in the context of the pensions tax regime. In Cherry (PO-7096), the complainant was a former police officer who left police service and took his benefits under the police pension scheme in June 2011, but was re-employed in materially the same role less than a month later. His re-employment in these circumstances resulted in the loss of his protected pension age. This meant his past and future pension payments up to age 55 were unauthorised payments, attracting significant tax charges.

The Ombudsman held that Mr Cherry’s employer had a duty of care to provide him with relevant information about the tax implications of re-employment on his retirement benefits. Interestingly, the Ombudsman suggested this duty arose because of the employer’s role as a “responsible employer” (paragraph 14), arguably resurrecting the concept of the duty to protect employees’ economic well-being considered and rejected by the Court of Appeal in Crossley v Faithful. Perhaps a significant factor in the outcome was the employer’s confirmation during the Ombudsman’s investigation that it had subsequently changed its processes to ensure employees were not re-employed until after a month had elapsed.

Also interestingly, the outcome of the Cherry case differs from a previous Pensions Ombudsman determination in 2014 relating to another area of the pensions tax regime. In Ramsey (PO-3290), the Deputy Ombudsman ruled that an employer was under no duty to warn a scheme member that the reduction in the annual allowance from 6 April 2011 would make him personally liable for an annual allowance charge if he elected to receive a major enhancement to his scheme benefits after that date. The Deputy Ombudsman accepted that “the common law authorities” made clear the employer was under no obligation to inform Mr Ramsey of the financial benefits of taking his benefits before the law changed (paragraph 22).

The recent introduction of the annual allowance taper for high earners may bring this area of the law into sharper focus. Broadly speaking, anyone with taxable income over £150,000 in the 2016/17 tax year will see their annual allowance for pension saving (which normally stands at £40,000) tapered down to £10,000 by the time their earnings reach £210,000. A key issue for employers is the extent to which they should warn employees about the impact of the taper. The danger is that if affected employees are unaware of it, they may find the main tax advantage associated with pension contributions (upfront relief) has been significantly diminished. Moreover, many high earners won’t know they are affected by the taper until after the 2016/17 tax year has closed, when their full taxable earnings are established (particularly as non-employment income such as rental income is also taken into account in assessing whether the taper applies). By then, it will be too late for them to adjust their pension contributions for the tax year.

Given the clear line of authority suggesting there is no implied duty on an employer to warn employees about the potentially disadvantageous financial consequences of the taper, many employers are likely to decide they should avoid giving any information at all. This would echo the position of the employer in Eyett, which adopted a blanket policy of not volunteering advice to employees. Some employers may also decide that the most prudent course of action is to stop offering pension contributions to high earners and offer alternative means of remuneration instead.

An important subsidiary point in all this is that if an employer gives information to employees (whether or not it’s under a duty to do so), case law indicates the employer must take reasonable care in giving the information (Hagen and others v ICI Chemicals & Polymers Ltd and others [2002] IRLR 31). Hence if an employer does decide to warn its employees about the impact of the annual allowance taper, or whatever else, it should make sure that what it tells employees is correct (as well as avoiding straying into the provision of regulated advice).