TUPE & Pensions (update)
by Roderick Ramage, solicitor, www.law-office.co.uk
This article is not advice to any person and may not be taken as a definitive statement of the law in general or in any particular case. The author does not accept any responsibility for anything that any person does or does not do as a result of reading it.
17 June 2002, updated 3 December 2003
pension liabilities passing under TUPE – new European ruling
At New Year 2001 I wrote to you and my solicitor and other professional contacts with a note about pensions issues in corporate finance transactions. An important new decision prompts a mid-year update. The ECJ decision in Beckman v Dynamco Whicheloe Macfarlane Ltd given on 4 June 2002 (available on the ECJ’s website at www.curia.eu.int/en) will make substantial changes in the treatment of pension schemes on assets sales. This has been followed by the similar case of Martin and others v South Bank University (Case C-4/01),  All ER (D) 85.
Regulation 7(1) of the Transfer of Undertakings (Protection of Employment) Regulations 1982 (TUPE) excludes occupational pension schemes from regs 5 and 6 of TUPE, so that practitioners have assumed that the employer’s liability for pension rights, unlike other employment rights, do not pass to the purchaser. In 1993 the government added sub-para (2) to reg 7 to reflect article 3(3) of the Acquired Rights Directive (Council Directive 77/187/EEC). This states that the exclusion applies only to rights to old-age, invalidity or survivors’ benefits, but does not apply to other benefits under an occupational pension scheme. The Beckman case shows that the exclusion is far narrower than had previously been thought.
Mrs Beckmann had been employed by the NHS and her employment was transferred to DWM under TUPE. When DWM dismissed her for redundancy it refused to pay her the early retirement pension, lump sum and other benefits to which she would have been entitled under the NHS scheme on the grounds that those benefits were excluded from TUPE. The ECJ held that: “Early retirement benefits and benefits intended to enhance the conditions of such retirement, paid in the event of dismissal to employees who have reached a certain age, such as the benefits at issue in the main proceedings, are not old-age, invalidity or survivors' benefits … within the meaning of Article 3(3) of Council Directive 77/187/EEC …”
Although Beckmann was concerned with redundancy pensions, the wording of the decision is so wide that it seems to include any early retirement including the right to retire early voluntarily. The Martin case considers this point further and dealt with the case of employees transferred from an NHS college to South Bank University, which involved (amongst other options) leaving the NHS Pension Scheme and joining the Teachers’ Superannuation Scheme, whose early retirement provision were less favourable than under the NHS scheme. One difference was that in the Teachers scheme a pension with maximum enhancement was mandatory in the case of early ill-health retirement but discretionary in respect of early retirement for any other reason. One part of the Martin judgment is that if the transferee dismisses or grants early retirement to a transferred employee, whose terms have not been lawfully varied, it will be bound by the transferor’s early retirement terms.
The practical conclusion from this is that a substantial part of employees’ pension scheme rights under an occupational pension scheme may now pass automatically under TUPE, even though there may be no provision whatever for corresponding assets to be transferred from the transferor’s pension scheme. It is to be hoped that the principle in the Bernadone case1 will apply. In that case the Court of Appeal held that liability for an industrial accident in tort could be transferred by reg 5 of TUPE and went further and held that where the transferor has effected an employer's liability insurance policy, the insured employer's right to indemnity under the insurance policy also transferred to the transferee. If this principle does apply, the transferee may acquire a right against the transferor’s pension scheme.
There is a further problem, resulting from the St Helens and the Meade and Baxendale cases2 and reiterated in Martin, which is that changes to the pension scheme after completion, even if made with the employees’ express consent, cannot be made lawfully if the changes result from the transfer and may result in claims for unlawful deductions from wages or constructive dismissal or both. In Martin is was said that “this protection is a matter of public policy, and therefore independent of the will of the parties to the contract of employment … so that it is not possible to derogate from them in a manner unfavourable to employees”.
It is still not clear where the boundary lies. It is clear that, if the transferor’s pension scheme entitles an employee to retire early and receive a pension, he or she is entitled to the same right from the new employer after a TUPE transfer. It cannot be the case that the transferred is entitled to more was provided for under the transferor’s scheme, but it now seems that, if under the transferor’s scheme the employee because entitled to a pension only if the employer consents to the early retirement, the employee would become entitled to a pension if the transferee allows or requires him or her to retire early. What constitutes retirement is unclear. Whilst dismissal for lack of capability or misconduct must be outside the concept of retirement, it cannot be put beyond argument that other forms of termination of employment over the minimum age for early retirement, eg for redundancy or reorganisation or even on arbitrary grounds (eg “I don’t like your shoes, you’re fired.”), might be held to be retirement for this purpose.
One response to these cases must be to reverse the earlier attitude that assets sales are to be preferred to share sales as a means of avoiding or at least minimizing the purchaser’s pension liabilities. The risk of some (but not all) pension benefits passing under Beckmann and Martin, the lack of supporting funds from the transferor’s scheme and the problems of changing pension terms after completion, now point to share sales as the safer route, albeit that a share sale may bring with the target company a potential liability for a debt on the employer under s75 of the Pensions Act 1995: see pensions post acquisition - participation and deficits.
What cannot be doubted is that he degree of prior disclosure and due diligence enquires about pensions must be rigorous and detailed and all warranties and indemnities in assets sales agreements must be carefully reconsidered, including, as the effect of these judgment is retrospective, those made in all agreements since 1981, when TUPE was introduced. In many cases it may be preferable for the transferee to estimate the potential cost of the pension risk and negotiate an adjustment to the price to reflect it, rather than to rely on indemnities alone.
I hope that this will be of some use to you and your clients and will be pleased to help if required in specific cases.
1 Bernadone v Pall Mall Services Group and Martin v Lancashire County Council  IRLR 487, ca.
2 Wilson v St Helens Borough Council and Meade and Baxendale v British Fuels Ltd,  IRLR 505, CA; affd. IRLR 706, HL
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