TUPE, pensions and contracting-out

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

first published in New Law Journal (website) on 13 January 2012



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.


TUPE, pensions and contracting-out


·      Contract terms may be altered by agreement.

·      The parties may not contract out of statutory employment protection rights.

·      The restriction on contracting-out does not apply to some important pension rights, even though linked to TUPE. 


changing contract terms

Unless the contract expressly provides for it, no party can alter it unilaterally, but the parties can alter it consensually.  Alterations of contracts are themselves made by contract.  Employment contracts are no different from other contracts, but, because of the respective bargaining strengths of the parties, employers, if they stay successfully on the right side of the boundary between business justification and unfair dismissal, can vary employment contract unilaterally by a process of an offer of new terms, consultation, warning, and eventually dismissal and coupled with reengagement on new terms: technically, if this process runs its course, what starts as a proposal to vary the contract ends as a rescission and new contract.


the contracting-out restriction

Normal contract rules do not employ to statutory employment protection rights.  Employers and employees may not contract out of the latter’s statutory employment protection rights, except by an ACAS conciliation or a compromise agreement: Employment Rights Act 1996, s203.  Regulation 18 of the Transfer of Undertakings (Protection of Employment) Regulations 2006, SI 2006/246 (TUPE) states that s203 of the 1996 Act applies in relation to these regulations in TUPE as if they were contained in that Act.


(mostly) pension protection rights

1     Regulation 10 exempts from the automatic transfer provisions of regulations 4 and 5 of TUPE the right to benefits under an occupational pension scheme for old age, invalidity or survivors.  This is an exemption and not an employment right. so the contracting-out restriction is irrelevant.

2     Other rights under occupational pension schemes, including the so-called Beckmann rights, are outside the exemption.  These rights take their name from the ECJ decision in Beckmann v Dynamco Whicheloe Macfarlane Ltd [2002] IRLR 578 (ECJ).  The most common example is that, usually in public sector but sometimes in “paternalistic” private sector schemes, a members is entitled to an early retirement pension, which is not reduced actuarially for early payment, if his or her employment is terminated on the grounds of redundancy or business efficiency.  These rights, not being in the pension exception, pass under TUPE and are subject to the contracting-out restriction.

3     Employees’ rights under a personal pension scheme, which include GPPPs and stakeholder pension schemes (disregarding the possibility that a stakeholder scheme can be established as an occupational scheme) are rights which pass under TUPE and are subject to the contracting-out restriction.

4     In June 2004 the Government issued Fair Deal for Pensions, because contractors bidding for public sector work could save costs on pensions because normal pension benefits are excluded from TUPE.  Fair Deal was intended to remedy the loss suffered by transferring employees of public sector pension scheme membership, by requiring the transferee to provide for transferring employees pensions, which are the same as or broadly comparable with the transferring authority’s public sector scheme.  The weakness of Fair Deal is that it is not statutory and is unenforceable, unless the outsourcing authority imposes a contractual obligation in the contractor to comply with it.  No employment rights giving pension benefits in accordance with Fair Deal, although given to mitigate the impact of the TUPE regulation 10 exemption,  are rights under TUPE or the ERA 1996, and therefore normal contract principles apply, namely that the parties to a contract may vary them free from the contracting-out restriction.

5     With effect from 1 October 2007, the Best Value Authorities Staff Transfers (Pensions) Direction 2007 gives employees, who transfer under TUPE on the outsourcing of a service, a right to the pension benefits to which he or she would have been entitled under the relevant public sector scheme.  This right, like rights given as a result of Fair Deal is also not subject to the contracting-out restriction.

6     Sections 257 and 258 of the Pensions Act 2004 and regulations made under them require the transferee of employees transferring under TUPE to offer a pension scheme to any of the transferring employees who are members of the transferor’s occupational pension scheme or eligible to join it.  The pension scheme to be offered may be salary related, but the usual is money purchase, which the transferee may offer whether or not the transferring employee was entitled to BD rights under the transferor’s scheme.  If the transferee’s scheme offered to the transferring employees is money purchase, the transferee must match the employees’ contributions up to 6% of pay.  The 6% rate is not dependent on the rate payable under the transferor’s scheme, so it is possible that a transferring employee formerly paying contributions of less than 6% to increase them to 6% or more after the transfer, obliging the transferee to pay up to 6% even though the transferor was paying contributions at a lower rate.  This right too is not a right under TUPE or the ERA 1996, and therefore normal contract principles apply, namely that the parties to a contract may vary them free from the contracting-out restriction.

7     (Not a TUPE issue.)  Automatic enrolment into pension schemes, to be introduced over four years from October 2012 will be outside the contracting-out restriction, but jobholders, which include employees and workers, will be protected by the obligation on all employers to enrol them automatically into a qualifying pension scheme and permitting jobholders to opt-out only through a tedious procedure.


an unfair unintended consequence

The contrast between the pension obligation in ss 257, 258 and that applicable to personal pension schemes under TUPE provides a nice irony for lawyers, a HR headache for employers and potential grievances for transferring employees.  Transferring employees, whose former employer paid a generous 10% of pay to an occupational money purchase scheme, are not entitled to require the receiving employer to pay contributions at a rate above 6%, but other transferring employees, whom the transferring employer permitted instead to enter into personal pension scheme to which it paid the same 10% contribution rate, are entitled to compel the receiving employer to pay contributions at the 10% rate.




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