Johnson Johnson Uk Group Retirement Plan · CAS-12388-L3Z2

CAS-12388-L3Z2

Ombudsman’s Determination Applicant Mr Y

Scheme The Johnson & Johnson UK Group Retirement Plan (the Plan)

Respondent Johnson & Johnson Consumer UK Limited (Johnson & Johnson)

Outcome

Complaint summary

Background information, including submissions from the parties

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This information was based on the operation of the Global Compensation Framework (GCF) which was introduced in 2011 and so only relevant to Mr Y’s 2011 and 2012 bonuses.

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Following the complaint being referred to TPO the following submissions were made.

Johnson & Johnson’s submissions

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Johnson & Johnson had been unable to provide a formal or documented policy to show how bonuses were converted for overseas members. The inconsistent explanations show that Johnson & Johnson has, “failed in their duty to manage (and calculate) [his] pension benefits accurately.”

Year Johnson & Johnson Mr Y's Calculation – Difference Records – Bonus (£) Bonus (£) (£) 2010 19,492 33,413 -13,921 2011 31,135 32,812 -1,677

4 CAS-12388-L3Z2 2012 32,069 36,379 -4,310

Adjudicator’s Opinion

• The Adjudicator said that Mr Y had been given incorrect information regarding the method Johnson & Johnson used to convert his bonus. The Adjudicator thought it was clear that Mr Y was provided with the incorrect method on multiple occasions, which has left him unwilling to accept Johnson & Johnson’s figures. However, the quotation of the incorrect method did not entitle Mr Y to have his bonuses calculated using a method that was incorrect for a different reason.

• Although Johnson & Johnson had been unable to provide a codified policy to show how it converted each year’s bonus, it had been able to provide information regarding the history of how it calculated bonuses. Part of Mr Y’s complaint was that there was no written policy to confirm how bonuses were converted. It followed that he could not point to any policy that showed his bonus should have been calculated using a direct conversion as he stated it should be. As such, neither party could definitively prove how bonuses should have been converted. The Adjudicator explained that where there is an absence of a proven policy, the Ombudsman will look to make a decision on the basis of what was most likely to have been correct, on the balance of probabilities.

• Johnson & Johnson said that it changed its process to convert Mr Y’s bonus in relation to “what would have been appropriate for the member’s level, job scope and performance in the UK”. Although, due to the length of time, it has not been able to say when this policy was in place. It appears that this was the case 5 CAS-12388-L3Z2 between 2008 and 2010, and the Adjudicator believed it was more than likely that Johnson & Johnson was referencing a notional UK bonus during this period.

• Johnson & Johnson only said that, during the period of 2008 to 2010, the bonus had always been calculated using a straight conversion when it was represented by Hogan Lovells. At every other opportunity, it said that it used to set its bonus with reference to a UK member. While the Adjudicator accepted that Johnson & Johnson should be responsible for the information Hogan Lovells provided on its behalf, he thought it was likely that Hogan Lovells misunderstood how the bonus was historically calculated. The Adjudicator was of the view that it was more than likely that the 2010 bonus conversion was calculated on the basis of referencing a notional UK bonus and that was the reason for the significant difference between the figures produced by Mr Y and Johnson & Johnson.

• The Adjudicator noted that Johnson & Johnson confirmed that the final two years of Mr Y’s employment were calculated using a straight conversion. Given that Mr Y had argued that his bonus should be calculated using a straight conversion, the Adjudicator’s view was that there was no dispute about how these years should have been calculated. Mr Y believed that Johnson & Johnson should be made to use his calculations. However, Johnson & Johnson maintained that its calculations were correct.

• Johnson & Johnson has said that the discrepancies could stem from using the exchange rate from a different date, however it could not confirm which date it used. Johnson & Johnson has also said that it used Mr Y’s preferred method, of direct exchange rate, to calculate his bonus for the last two years of his service. It has also explained the discrepancy; so, in the Adjudicator’s view as this explanation appeared likely and plausible, this part of the complaint could not be upheld.

• The Adjudicator was of the view that the differences in bonus calculations could be attributed to the various methods used to calculate Mr Y’s bonus. He was of the view that it was more than likely that the conversions were completed correctly and in accordance with the policy in place at the time. As a result, the Adjudicator did not believe that there had been financial loss.

• Mr Y was only made aware that Johnson & Johnson used notional bonus values on 2 January 2018. Even after he had been made aware of the notional bonus, there was inconsistent information as to which years the notional bonus was applied. This would likely have caused serious distress and inconvenience to Mr Y, as he would have been in receipt of several pieces of inconsistent information over a number of years. The Adjudicator’s opinion was that a payment of £1,000 was warranted.

Mr Y did not accept the Adjudicator’s Opinion and provided further submissions. Mr Y accepted that the 2010 figure was likely based on the notional salary/bonus.

6 CAS-12388-L3Z2 However, he said that his role was totally unique to Switzerland and nothing like it existed in the UK. So, it was impossible to do a notional comparison.

He also argued that the direct conversion, used in 2011 and 2012, undervalued his salary. He said that Johnson & Johnson used exchange rates that were beneficial to it. The below table shows the conversion figures produced by both parties.

Year Calculated by Exchange Rate Accepted GBP (and date) bonus (CHF) converted amount (£)

2011 Johnson & 1.55 (Unknown) 48,233 31,135 Johnson

2011 Mr Y 1.47 (31/3/2011) 48,233 32,812

2012 Johnson & 1.63 (Unknown) 52,386 32,069 Johnson

2012 Mr Y 1.44 (31/3/2012) 52,386 36,379

The Adjudicator remained of the view that the 2010 bonus had been calculated correctly. He reviewed the figures provided by both parties and the prevailing exchange rates at the time and saw that the 2011 conversion factor was within the range of prevailing exchange rates in place at the time. So, he was satisfied that the 2011 figure was correct. The Adjudicator’s calculations are set out in Appendix one.

However, the Adjudicator was of the view that the conversion factor that Johnson & Johnson used for 2012 was not evidenced by the exchange rates at that time. The Adjudicator said that, unless Johnson & Johnson was able to evidence the conversion rate it used, the Pensions Ombudsman would likely expect the bonus to be calculated with the available exchange rates. The exchange rate at the time meant that the bonus should have been £36,128 instead of £32,069. In turn, this took Mr Y’s earnings above the Scheme Earnings Cap, which was £117,600. So, his pensionable earnings for 2012 should have been £117,600. Mr Y’s final pensionable pay should be:

[98,800.56] + [£112,864.43] + [£117,600] = £329,264.99 / 3 = £109,755

Johnson & Johnson agreed that the 2012 figure was undervalued and said it would increase Mr Y’s final pensionable salary accordingly, in line with the Adjudicator’s suggestion. It also said that, as a gesture of goodwill, it would write off the shortfall in employee contributions that were now owed and that it would make a payment of £1,000 in recognition of the distress and inconvenience Mr Y had suffered.

7 CAS-12388-L3Z2 Despite the amendment to his final pensionable salary, Mr Y still felt that his bonuses and, by extension, his final pensionable salary were calculated incorrectly. He disagreed with Johnson & Johnson using a notional conversion in 2010, as his role was unique. He also maintained that the conversion figure used for 2011 was detrimental for him. He said that Johnson & Johnson should be required to evidence the date it calculated the conversion.

As Mr Y did not accept Johnson & Johnson’s offer to put things right, the complaint had been passed to me to consider.

Ombudsman’s decision

Calculation of the 2010 bonus

I have considered the information that has been provided regarding Mr Y’s 2010 bonus and it is clear that there has not been a straight conversion of CHF to GBP as the prevailing exchange rates do not support this approach. A different methodology has been used, and I do not find any reason to doubt Johnson & Johnson’s assertions that Mr Y’s bonus, for the purposes of the Plan, was based on a notional UK base salary.

My starting point is of course to review the Plan rules which provide for the calculation of Mr Y’s benefits. Johnson & Johnson have provided a copy of the Replacement Definitive Trust Deed and Rules dated 4 February 2004 (the 2004 Rules) and a copy of Replacement Definitive Trust Deed and Rules dated 1 April 2012 (the 2012 Rules). The 2012 Rules were adopted with effect from 1 April 2012 and apply to any members still in service on that date. They were adopted pursuant to the power of amendment in clause 4 of the 2004 Rules which provided that the Trustee may by deed amend the 2004 Rules with the consent of the Principal Employer and with retrospective effect subject to certain provisos including that no amendment shall be 8 CAS-12388-L3Z2 made which “diminishes the amount of any pension or other periodical payment presently payable or affects in any way prejudicially the accrued rights of any Member”.

It is understood that the relevant provisions applicable to Mr Y after 1 April 2012 are the provisions of the 2012 Rules, provided these did not affect his accrued rights prejudicially in any way.

Under Rule 7 of Schedule 2 to the 2012 Rules, a member’s benefits, in respect of his service completed between 1 July 1993 and 1 April 2012, are calculated on the basis of his “Final Pensionable Salary 2”.

Final Pensionable Salary 2 is defined in Schedule 1 to the 2012 Rules as relevant as:

“the greater of:

• the average of the three highest annual Pensionable Salary 2 figures during the 10 years ending on 31 March 2012, and

• the average of his annual Pensionable Salary 2 figures during the 36 consecutive months ending on 31 March 2012 (…)

The annual Pensionable Salary 2 figures shall each relate to separate period of 12 consecutive months.”

Pensionable Salary 2 is defined “for any period” as “the Member's Gross Earnings 2 LESS the proportion of the Lower Earnings Limit applicable to the same period”.

As relevant, Gross Earnings 2 is defined as:

“the Member's total earnings from the Participating Employers excluding benefits in kind and share bonuses but including 100% of any discretionary annual performance cash bonus.

Provided that:

• only 85% of any discretionary annual performance cash bonus paid after 1 January 2006 to employees in Band 30 and above of the global banding structure operated by the Johnson & Johnson group of companies shall be taken into account when calculating Gross Earnings 2, and

• Gross Earnings 2 shall not exceed the Earnings Cap except when calculating Pensionable Salary 2.

The Participating Employer shall advise the Trustee of the amount of Member’s Gross Earnings 2 for the purposes of the Plan (…).”

The 2004 Rules contained similar provisions and in particular used a definition of Final Pensionable Earnings 2 and Pensionable Earnings 2 based on Gross Earnings which in turn were defined as “the Member’s total earnings from the Participating

9 CAS-12388-L3Z2 Employers including discretionary cash bonuses but excluding benefits in kind and share bonuses. The Participating Employer shall advise the Trustees of the amount of a Member’s Gross Earnings 2 for the purposes of the Plan.”

Assuming Mr Y was not in Band 30 or above, there is no material difference in the definitions, and I see no adverse change that might be invalid.

The only issue which I need to determine in this case is how Mr Y’s “total earnings… including 100% of any discretionary annual performance cash bonus” is to be determined for the purposes of the Plan, having regard to the fact that his bonus was paid in CHF and the relevance of the GBP adopted by Johnson & Johnson in 2011.

There appears to be no dispute that Mr Y’s annual bonus was pensionable and is a discretionary annual performance cash bonus for the purposes of the Plan (and would have been a discretionary cash bonus under the 2004 Rules).

There is nothing in the definition of Gross Earnings 2 (or the definitions of Pensionable Earnings 2 and Final Pensionable Earnings 2) or any other provision of the 2012 Rules that indicate that the amount of a member’s “total earnings” and “discretionary annual performance cash bonus” is not simply a matter of fact. Whether a member is awarded a discretionary bonus may depend on the exercise of his employer’s discretion but once it is awarded, that it has been awarded and its amount are matters of fact and the 2012 Rules do not provide for any further discretion to be exercised by Johnson & Johnson in deciding whether it forms part of his Gross Earnings 2 and how it should be valued.

I should add that I do not interpret the provision “the Participating Employer shall advise the Trustee of the amount of Member’s Gross Earnings 2 for the purposes of the Plan” as importing any discretionary power for the Participating Employer to decide that a different amount will be the member’s Gross Earnings 2. It simply imposes on the Participating Employer an obligation to provide the essential factual information to the Trustee. As this information should be within the possession of the Participating Employer it should not be onerous. The only issue is as to the amount in GBP of amounts not paid or awarded in GBP.

I also note that while for determining whether the member is “a Band 30 or above employee” for whom only 85% of any discretionary bonus will be pensionable, the 2012 Rules refer to the “global banding structure”, no reference to the GCF is made for determining the amount of any discretionary bonus. Policies such as the GCF may well be relevant in setting salaries or in determining what discretionary bonus each employee should be awarded, but once a bonus has been awarded, the GCF is not relevant for determining the amount for the purpose of calculating Gross Earnings 2 under the 2012 Rules.

Nothing in the 2012 Rules permits the Trustee to use (or Johnson & Johnson to provide) a notional bonus amount that was not the actual amount of the bonus paid to Mr Y. The GCF could not override the provisions of the 2012 Rules. An amendment to the 2012 Rules would have been required to provide for the use of notional rather 10 CAS-12388-L3Z2 than actual bonuses in the calculation of Gross Earnings 2. The GCF did not have the effect of amending the 2012 Rules (or the 2004 Rules) which required amendment by deed (and subject to the proviso of not adversely affecting accrued rights).

I have not identified any provisions in the 2012 Rules addressing currency conversion for amounts not paid in GBP. The 2004 Rules included provision that benefits be paid “in sterling or such other currency as the Trustee shall decide” (Rule 23) but this was not repeated in the equivalent rule in the 2012 Rules (Rule 39). This is not material. The Plan is a UK based occupational pension scheme, and it is reasonable that all amounts be determined in GBP. The only point is how amounts paid in CHF should be converted to GBP for the purposes of calculating Gross Earnings 2, Pensionable Earnings 2 and Final Pensionable Earnings 2.

The question is, if an employee is paid an amount in CHF, what is the value on the same day of that amount in GBP? There is some room for administrative flexibility and for internal policy and practice to apply, particularly in relation to the payment of a discretionary annual bonus. If Johnson & Johnson use a particular conversion rate reasonably determined by their finance department for such purposes that would be an acceptable rate to use, provided it is reasonably consistent with published rates at the relevant time. I would also consider it reasonable to apply either the exchange rate on the date the amount becomes payable or on the date of actual payment or an average rate for the relevant month. According to the evidence of Hogan Lovells, where a bonus was paid to an overseas member, there was a direct conversion of the bonus amount from local currency to GBP at the date of payment. Other evidence provided by Johnson & Johnson is that, originally, the conversion was made using the exchange rate advised by Johnson & Johnson’s finance function for the month the bonus was awarded. Either would be acceptable in my view.

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Directions

Camilla Barry

Deputy Pensions Ombudsman 24 June 2025

12 CAS-12388-L3Z2 Appendix one: Bonus calculations for 2011 Johnson & Johnson’s calculations for 2011 were:

Gross pensionable pay + Bonus – LEL = £86,772.00 + £31,135.00 - £5,042.57 = £112,864.43

Given that Johnson & Johnson said that the bonus would have been converted some time in February 2011, the worst exchange rate from that month, from Mr Y’s point of view, has been used.

Calculated by Exchange Rate Accepted bonus GBP converted (and date) (CHF) amount

Johnson & Johnson 1.55 (Unknown) 48,233 31,135

Mr Y 1.47 (31/3/2011) 48,233 32,812

TPO 1.56 (13/2/2011) 48,233 30,919

The worst exchange rate would have converted Mr Y’s bonus to £30,919, which was less than the amount used to calculate his pensionable pay. So, the Adjudicator was satisfied that Johnson & Johnson’s calculations were within the possible range.

13 CAS-12388-L3Z2 Appendix two: Bonus calculations for 2012 Johnson & Johnson’s calculations for 2012 were:

Gross Pensionable Pay + Bonus – LEL = £89,375.00 + £32,069.00 - £5,300.44 = £116,143.56

Mr Y has said that the bonus was underestimated.

Given that Johnson & Johnson said that the bonus would have been converted some time in February 2012, the worst exchange rate from Mr Y’s point of view has been used.

Calculated by Exchange Rate (and Accepted bonus GBP converted date) (CHF) amount

Johson & Johnson 1.63 (Unknown) 52,386 32,069

Mr Y 1.44 (31/3/2012) 52,386 36,379

TPO 1.45 (13/2/2012) 52,386 36,128

As you can see, the worst exchange rate would have converted Mr Y’s bonus to £36,128 which was significantly more (£4,059) than the amount used to calculate his pensionable pay.

Gross Pensionable Pay + Bonus – LEL = £89,375.00 + £36,128.00 - £5,300.44 = £120,202.56

This would be capped by the Scheme Earnings Cap. So, his 2012 pensionable earnings would be £117,600.

14 CAS-12388-L3Z2 Appendix three: Final amended bonus calculations Year Exchange rate Accepted bonus GBP converted (CHF) amount

2010 1.63 53,460 32,798

2011 1.55 48,233 31,135

2012 1.45 52,386 36,128

Amended amounts

2010 84,245.00 + 32,798.00 - 4,936.44 = 112,106.56

2011 86,772.00 + 31,135.00 – 5,042.57 = 112,864.43

2012 89,375.00 + 36,128.00 - 5,300.44 = 120,202.56*

*This would be capped by the Scheme Earnings Cap. So, his 2012 pensionable earnings would be £117,600.

The total figures are then divided by 3 to give a final pensionable salary on leaving the Plan:

112,106.56 + 112,864.43 + 117,600 = 342,570.99

342,570.99/3 = £114,190.33

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