A police authority has been held to be liable for negligent misstatement for informing retiring officers that their lump sums would be tax free despite knowing that the officers’ immediate re-employment would have adverse tax consequences.
Normal minimum pension age (“NMPA”) under a registered pension scheme increased to 55 on 6 April 2010. A pension paid below 55 is an unauthorised payment. However, members with a “protected pension age” can receive benefits before age 55 without them being treated as unauthorised, provided certain conditions are met, including the member actually having retired from service.
Subsequent re-employment by a connected employer can cause a protected pension age to be lost, except in certain cases (such as where there has been a break of at least one month after retirement, and the member’s employment is “materially different in nature” to their employment immediately before retirement).
The High Court also had to consider the implications of the House of Lords’ judgment in Scally v Southern Health Board (“Scally”). In that case, the House of Lords implied a term into a contract of employment requiring the employer to take reasonable steps to inform the employee of a valuable pension right conferred by the contract of which the employee could not otherwise have been expected to be aware.
The appellants were police officers from two different forces (Avon and Somerset, and Essex), with protected pension ages who retired before NMPA. When they returned to employment within one month of retirement, they lost their protected pension ages, and became subject to tax charges on their lump sum and on their pension payments until they reached age 55.
The officers complained that they had been encouraged to take up reemployment (a widespread practice), and that they had not been made aware of the tax consequences of doing so. They complained to TPO that the police authorities (as the administrators of the police pension schemes) and chief constables were in breach of their duties by failing to advise or inform them of the tax consequences.
Having discussed, and distinguished, the decision in Scally, TPO dismissed their complaints, finding that the police authorities and chief constables did not owe a duty to the officers in either contract or tort.
The officers appealed to the High Court.
Ordinarily, referrals to the High Court may only be made on points of law and not fact. However, in this case the Court agreed with the appellants criticisms of TPO, and reviewed TPO’s findings. Mr Justice Morgan agreed that TPO had not made all of the findings of fact which were necessary to make a final decision, and had not dealt with the question of negligent misstatement.
Avon and Somerset police authority’s communications had stated that payments to the officers would be “tax free”. The authority ought to have known the law in this area (they should have been familiar with the widely publicised changes to the legislation, and with the readily-available guidance in this area, and they had statutory responsibility to report tax charges to HMRC), and they knew the officers were being reemployed shortly after retirement. They therefore had a responsibility not to make statements which were foreseeably misleading.
The letters sent did not include any disclaimer of responsibility for the information, and the police authority was not entitled to assume that the officers would seek independent advice. Further, the officers were not unreasonable not to do so. The Court found that the officers had also acted reasonably in relying on the statements, and had they been given the correct information, they would have postponed the date of their re-employment to avoid the tax liability.
As the relationship between the parties was proximate, and involved foreseeability of harm, and it would be fair, just and reasonable to impose liability, Avon and Somerset police authority were guilty of negligent misstatement and liable for the loss suffered.
In relation to the Essex authority, the Court could not make the same finding of knowledge of re-employment of the officers. This element may now pass back to TPO to determine (unless the Police and Crime Commissioner for Essex accepts that similar specific findings of fact are appropriate in their case).
The Court stated that Scally had been decided on narrow grounds. Although the officers were in a quasi-employment relationship with the chief constables there was no right arising under this quasi-employment of which they were unaware. Therefore, to hold that the chief constables had a duty to warn the officers about the tax consequences of their reemployment would be “a major and unjustified extension” of Scally. In addition, the judge considered it relevant that the chief constables were not responsible for administering the pension scheme or for the re-employment of the officers.
The decision is of course specific to its facts. However, it serves as a useful reminder of both the circumstances in which protected pension ages may be lost, and the duty schemes have to take care in their communications.
The case is also a confirmation that the decision in Scally is to be applied narrowly, and that the courts are unwilling to impose wider duties of care on employers in terms of protecting employees’ economic interests.