TUPE and pensions

by Roderick Ramage, solicitor, www.law-office.co.uk

first published (by distribution to professional contacts) on 28 December 2006



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.


Two sets of changes have taken place from 6 April 2006.


1 : pensions after a TUPE transfer

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 article 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.  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 transferor’s occupational pension 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; or

(c)      the employee would have been an active member or eligible if he had been employed for a longer period.

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.  Under option (i) the transferee’s scheme may be either salary related or money purchase, regardless of the kind of scheme that the transferring employee belonged to before the transfer or the kind that the transferee that it offers to its other employees.

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

(i)       satisfy the "reference scheme" test, ie what must be provided to contract out of the State Secondary Scheme on a final salary basis; 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 art 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, including grouped personal pension schemes (GPPPs) are not occupational schemes and are not within the exemption in article 10 of TUPE.  There is an anomaly that members of GPPPs and other personal pension schemes and stakeholder schemes may be better off after a TUPE transfer than members of a money purchase occupational scheme.  The right to contributions to a GPPP etc passes under TUPE.  Therefore, if an employee is entitled to employer’s contributions over 6%, the transferee will not be limited to the statutory maximum of 6% applicable where the transferor’s scheme is occupational.


2 : life assurance after a TUPE transfers

The survivors’ benefits exemption in article 10 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-s (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 is that stand alone death in service 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, because life assurance on its own is not ancillary to the pension benefits of an 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.  As 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.


(for a fuller but older version of this article, click here)


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