Pensions Act 2004 and TUPE
by
Roderick Ramage, solicitor, www.law-office.co.uk
first
published in New Law Journal on 21
January 2005
DISCLAIMER
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 (www.law-office.co.uk). 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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