TUPE & Pensions
(update)
by Roderick Ramage, solicitor,
www.law-office.co.uk
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.
17 June 2002, updated 3 December 2003
name
address
address
address
pension liabilities passing under
TUPE – new European ruling
Dear name,
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), [2003] 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.
Yours sincerely,
notes:
1 Bernadone v Pall Mall Services Group and Martin v
Lancashire County Council [2000] IRLR 487, ca.
2 Wilson v St Helens Borough Council and Meade and Baxendale
v British Fuels Ltd, [1997] IRLR 505, CA; affd.[1998]
IRLR 706, HL
copyright
Roderick Ramage
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