Pensions Act 2004 and TUPE

by Roderick Ramage, solicitor,

first published in New Law Journal on  21 January 2005



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.

1 : life assurance only scheme (added 18/11/06)

The survivors’ benefits exemption in art 20 of TUPE may be restricted in the case of life assurance only schemes by the (probably unintended effect of s255 of the Pensions Act 2004.  Sub-section (1) requires the trustees of a UK occupational pension scheme to “secure that the activities of the scheme are limited to retirement-benefit activities”.  By ss(5) retirement benefits “means (a) benefits paid by reference to reaching, or expecting to reach, retirement, and (b) benefits that are supplementary to benefits within paragraph (a) and that are provided on an ancillary basis (i) in the form of payments on death, disability or termination of employment, or (ii) in the form of support payments or services in the case of sickness, poverty or need, or death”.

The generally accepted view of s255 of the Pensions Act 2004, certainly the one propounded by the Pensions Regulator (TPR), is that life assurance only schemes, such as many employers provide when pensions are provided through a GPPP or stakeholder scheme, ceased to be occupational schemes from 6 April 2006.  The reason is that the life assurance, being stand alone, is not ancillary to the pension benefits in the occupational scheme.  This does not affect their tax treatment.  Schemes which had been approved before 6 April 2006 ceased to be approved on that day and automatically became registered by sch 36 of the Finance Act 2004.  The fact that they are no longer occupational does not affect their registration or tax treatment.

However for TUPE purposes there is a substantial change.  If, as seems to be the case, these life assurance only schemes are no longer occupational, they are no longer exempt from transfer, even though they provide survivors’ benefits.  Therefore transferees under TUPE, where the transferor has such a scheme,  may now have to provide the same life assurance or other death in service benefits for the transferring employees after the transfer as they had before.  There is a time trap here.  Cover, whether through the transferor’s scheme or the transferee’s new scheme, must be in place immediately on completion in order to avoid the risk of a member dying just after completion (but before insurance has been arranged), and the grieving widow presenting herself with a babe in arms at the office the next morning asking how much she is getting and when will she get it.

There is a sting in the tail.  The Employment Equality (Age) Regulations 2006, SI 2006/1031 (as amended) has no exemption for life assurance, so, if employees are kept on after age 65 (or whatever the normal retirement age is), life assurance must continue to be provided, even though the cost will increase substantially with increasing age.  It may be arguable that the refusal to give life assurance or giving reduced life insurance cover over a certain age, because of cost, is “a proportionate means of achieving a legitimate aim” (of running a business and keeping older workers in employment).  Commentators seem to think that there will be difficulties in maintaining this argument successfully.  One mitigating factor is that a death in service lump sum (an “uncrystallised funds lump sum death benefit” defined in para 15, sch 29, Finance Act 2004) is payable on death before reaching age 75.  There is therefore a statutory override, which probably  protects an employer from a claim of discrimination for failing to provide cover from age 75, as long as the death in service scheme is registered with HMRC.


2 : the transferee’s obligations after a TUPE transfers

Sections 257 and 258 of the Pension Act 2004 altered the effect of Transfer of Undertakings (Protection of Employment) Regulations 2006, SI 2006/246 (formerly 1981) (TUPE) with effect from 6 April 2005, where the transferor is an employer in relation to an occupational pension scheme.  TUPE itself is not altered, and therefore the exemption in reg 10 (formerly 7) of TUPE remains in force, and rights to old-age, invalidity or survivors’ benefits under the transferor’s occupational pension schemes do not pass to the transferee:  see my article TUPE and pensions (  However the transferee will be required to provide pension rights to transferring employees if immediately before the transfer:

(a)     the employee was an active member of the scheme and, if the scheme is money purchase, the employer is required to or has actually made contributions to it;

(b)     the employee was eligible to become a member and, if he were a member and the scheme is money purchase, the employer would have been required to make contributions to it; or

(c)      the employee would have been an active member or eligible if he had been employed for a longer period with a similar condition as in (b) about the employer.

It becomes a condition of the contract of employment of each such employee that either (i) the employee is or is eligible to be a member of an occupational pension scheme in respect of which the transferee is an employer or (ii) the transferee must make “relevant contributions” to a stakeholder pension scheme of which the employee is a member.  In cases (a) and (b) the obligation arises on the day on which the employee becomes employed by the transferee and in case (c) from the day on which the employee would have been a member of the transferor’s scheme or, if earlier, eligible for membership.  Under option (i) the transferee’s scheme may be either salary related or money purchase, regardless of the kind of scheme that it offers other employees or that the transferring employee belonged to before the transfer.

If the transferee's occupational scheme is salary related, what is to be provided must either:

(i)    satisfy the "reference scheme" test, which is what must be provided to contract out of a salary related scheme, ie pension at age 65, accrual at 1/80th on 90% of earnings between the NIC lower and upper earnings limits (LEL and UEL, which for 2005/6 are respectively £4,895 and £32,760) and 50% pension for surviving spouse; or

(ii)  comply with such other requirement as is prescribed, ie (by reg 2 of the Transfer of Employment (Pension Protection) Regulations 2005, SI 2005/649) either (a) the scheme provides benefits  the overall value of which equals or exceeds 6% of pensionable pay or (b) the transferee pays “relevant contributions” (defined in reg 3) on behalf of the member.

If the transferee's occupational scheme is money purchase, the transferee's obligation, as with a stakeholder scheme, is to make “relevant contributions”.  These are prescribed by reg 3 of the Pension Protection Regulations as contributions which match the employee’s contributions up to a maximum of 6% of the employee’s remuneration.  Remuneration for this purpose is basic pay, disregarding bonus, commission, overtime and similar payments.

Personal pension plans are not occupational schemes and are not within the exemption in reg 10 of TUPE.  There has however been some uncertainty about grouped personal pension schemes (GPPPs).  The practical view taken by most pension and TUPE practitioners is that GPPPs are personal and not occupational schemes, although they can fall into the literal wording of the original definition of occupational in s1 of the Pension Schemes Act 1993.  Section 239 of the 2004 Act substitutes new s1 definitions, the easy part of which is that a personal pension scheme is one which is not an occupational scheme and the difficult part of which (the new section has only twice the number of words as the original but is three times as hard to read) says that an occupational scheme is what we already know it is.

The anomaly here is that members of GPPPs and other personal pension schemes and stakeholder schemes may still be better off after a TUPE transfer than members of a money purchase occupational scheme.  If the payment of the transferring employer's contributions to a GPPP etc is contractual, the right to it passes under TUPE.  Even if the transferor employer says that it is not contractual but is given as its discretion, it is likely, following Clark v BET [1997] IRLR 348, that a failure to continue it would be a breach of the implied duty of trust and good faith.  Therefore, if an employee is entitled to employer’s contributions over 6%, the transferee will not be limited to the statutory maximum of 6% but will have to pay the higher rate payable before the transfer.

My guess is that it will not take long for a someone acting for a disgruntled transferred employee raise a Clark v BET or similar argument to overcome the statutory limit applicable to occupational money purchase schemes, despite Walden Engineering Co Ltd v Warrener [1993] ICR 967 EAT and Perry v Intec Colleges Limited [1993] ILRL 56 EAT, both of which ruled against employees who had argued that a purposeful interpretation of regulation 7 would require a transferee to provide the same or equivalent pension benefits, and Adams v Lancashire County Council [1993] IRLR 420 in which the HC held that pension rights were excluded and was upheld in the CA [1997] IRLR 436.

Evidently the consultation period failed to level this bit of the playing field.


CORRECTION (7 February 2005)

I apologise for a mistake in this article as it appeared on page 88 in the New Law Journal for 10 January 2005.  In the first lines of the first two paragraphs on the middle column (the third and fourth main paragraphs below) the word "transferor's" should be "transferee's".  The meaning is that the transferor's scheme is final salary, the transferee's scheme can be either money purchase or final salary and not final salary as implied by my article, but if it is final salary it must either satisfy the reference scheme test or comply with prescribed requirements.




copyright Roderick Ramage

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