TUPE and pensions
by Roderick Ramage, solicitor, www.law-office.co.uk
first published (by distribution to professional contacts) on 1 January 2012
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.
The pensions ramifications of the Transfer of Undertakings (Protection of Employment) Regulations 2006 (TUPE) appear to be straightforward: assets sale, all the employees transferred automatically, pension are exempted. There is a little more to it in practice.
Regulation 10 of TUPE exempts from the automatic transfer provisions of regulations 4 and 5 the right to benefits under an occupational pension scheme for old age, invalidity or survivors. The two points to be noted are (1) that the exception applies to occupational and not personal pension schemes and then (2) to only what can be called ‘mainstream’ pension rights.
Other rights under occupational pension schemes, including the so-called Beckmann rights, are outside the exemption. These rights take their name from the ECJ decision in Beckmann v Dynamco Whicheloe Macfarlane Ltd  IRLR 578 (ECJ). The most common example is that, usually in public sector but sometimes in paternalistic private sector DB schemes, a member is entitled to an early retirement pension, which is not reduced actuarially for early payment, if his or her employment is terminated on the grounds of redundancy or business efficiency. The difference between the cost of the unreduced pension and that of the actuarially reduced pension, to which the member would otherwise be entitled, must be borne by the transferee, even though no pension funds are transferred.
Even if the transferor has never had an occupational pension scheme, it is possible that it has acquired Beckmann liabilities on a TUPE transfer to it in the past, and if so, these rights will pass to the transferee.
personal pension schemes
Section 1 of the Pension Schemes Act 1993 defines occupational and personal pension schemes. The main relevant characteristic of a personal pension scheme is that it is a contract between the employee and the pension provider, but not the employer. Separately the employer can contract to pay contributions and to provide a payroll deduction service for the employee’s contributions. Grouped personal pension plans (GPPPs) as well as employees’ individual policies are personal pension schemes. Stakeholder pension schemes can be occupational, but they are almost always personal. The employee’s contractual rights to require the employer to pay contributions and provide a payroll deduction service pass to the transferee under TUPE.
stand-alone life assurance schemes
Occupational pension schemes usually provide benefits on the death of an employee in service. These are benefits for dependants and so exempt from transfer under TUPE. There is a grey area if the employees belong to personal pension schemes or no scheme and the employer provides a stand-alone death in service scheme, usually funded by life assurance. A doubtless unintended consequence of s255 of the Pensions Act 2004 (activities of occupational pension schemes) is that stand-alone life assurance schemes are probably not occupational schemes. This has not been tested in the courts, but it is prudent to assume that rights under these schemes pass under TUPE.
alternative pension scheme
Sections 257 and 258 of the Pension Act 2004 apply, where the transferor is an employer in relation to an occupational pension scheme. The transferee is required to provide pension rights to transferring employees, who immediately before the transfer were active members of the scheme or eligible for it. The pension rights to be provided by the new employer can be salary related, but usually the transferring employees’ rights are satisfied by the provision of a money purchase scheme, even if the transferor’s scheme was salary related, to which it pays contributions, which match the employee’s contributions up to a maximum of 6% of the employee’s pay.
Anomalously, transferring employee A, who had been a member of the transferor’s occupational pension scheme to which the employer paid contributions at the rate of 10%, cannot require the new employer to pay more than 6%, whilst transferring employee B, who had a personal pension scheme to which the employer paid at the rate of 10%, can require the new employer to continue to pay at the 10% rate.
public sector - Fair Deal for Pensions and the 2007 Direction
In June 2004 the Government issued guidance known as Fair Deal for Pensions, to resolve the problem that contractors bidding for public sector work could save costs on pensions because normal pension benefits are exempted from TUPE. Fair Deal was intended to remedy the loss of public sector pension scheme membership suffered by transferring employees, by requiring the transferee to provide for them pensions, which are the same as or broadly comparable with the transferring authority’s public sector scheme. The weakness of Fair Deal is that it is not statutory and is unenforceable, unless the outsourcing authority imposes a contractual obligation on the contractor to comply with it. With effect from 1 October 2007, the Best Value Authorities Staff Transfers (Pensions) Direction 2007 gives employees, who transfer under TUPE on the outsourcing of a service, a right to the pension benefits to which they would have been entitled under the relevant public sector scheme.
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