TUPE and
pensions
by Roderick Ramage, solicitor,
www.law-office.co.uk
first published (by distribution to
professional contacts) on 28 December 2006
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.
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)
copyright
Roderick Ramage
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