making sure you (don’t) get your pension
by Roderick Ramage, solicitor, www.law-office.co.uk
first published in Procurement & Outsourcing Journal March/April 2012 number 5 www.legalease.co.uk
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.
· Outsourcing a service involves the transfer of employees under TUPE.
· “Mainstream” pension rights under occupational pension schemes are exempt from transfer under TUPE.
· Contract terms may be altered by agreement.
· The parties may not contract out of statutory employment rights, including rights under TUPE, except in accordance with the Employment Rights Act 1996, s 203.
· The restriction on contracting-out does not apply to some important pension rights.
what is the issue?
It’s common knowledge that, if you outsource a service, at least if you are in the public sector, the contractor takes the employees and must provide a broadly parable pension. Fair Deal and all that, so what’s the fuss. If only. This is actually quite an interesting subject, and when a lawyer says “interesting”, everyone else hears either “trouble” or “expensive” or both. I hope to show in this article that the position is not quite as straightforward as it seems, it also need not be as expensive as is feared
When the owner of a business sells its assets to another, the sale is a transfer of an undertaking for the purposes of the Transfer of Undertakings (Protection of Employment) Regulations 2006 (TUPE). The main effect of TUPE is that the employees in the business will pass automatically to the buyer on the terms of their existing contracts. Similarly, a contract to outsource a service is almost invariably a transfer of an undertaking, with the same consequence of the automatic transfer of the employees.
occupational pension schemes and Beckmann
Regulation 10 of TUPE exempts from the automatic transfer provisions of regulations 4 and 5 the right to benefits under an occupational pension scheme for old age, invalidity or survivors.
Other rights (ie not on old age or invalidity or for dependants) 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  IRLR 578 (ECJ). The most common example is that, usually in public sector but sometimes in paternalistic private sector final salary (or other defined benefit) schemes, a member 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. The extent of the Beckmann rights is still unclear, but the old age exemption is, according to the later ECJ case of Martin v South Bank University  IRLR 74 (ECJ) [Questions 1 to 3 para 61, limited to “.. only benefits paid from the time when an employee reaches the end of his normal working life as laid down by the general structure of the pension scheme in question..”.
Even if the transferor has never had an occupational pension scheme, it is possible that it has acquired Beckmann liabilities on a TUPE transfer to it in the past, and, if so, these rights will pass to the transferee.
Transferee employers might take some comfort from Hunter v Atos Origin (UK) Services Ltd, Pension Ombudsman’s determination 81760/2, which was that the Beckmann principle and TUPE did not apply, because Mr Hunter was a deferred member when his employment transferred. Cautious advisers might wait until the point is decided by the courts.
personal pension schemes
Personal pension schemes are not occupational schemes and are not within the exemption in reg 10 of TUPE. Therefore rights to personal pension schemes agreed between the transferor and the transferring employees pass automatically to the receiving employer with the transferring employees’ other employment rights. Grouped personal pension plans (GPPPs)are and stakeholder schemes almost invariably are personal and not occupational.
Section 1 of the Pension Schemes Act 1993 defines occupational and personal pension schemes. The main relevant characteristic of a personal pension scheme or policy is that it is a contract between the employee and the pension provider, but not the employer, for the payment of contributions and the provision of pension benefits. Separately the employer can contract to pay contributions to the employee’s policy and to provide a payroll deduction service for the employee’s contributions. GPPPs as well as employees’ individual policies are personal pension schemes. Stakeholder pension schemes can be occupational, but they are almost always personal. The employee’s contractual rights, which pass to the transferee under TUPE, are any obligation of the employer to pay contributions and provide a payroll deduction service.
stand-alone life assurance schemes
These schemes, which normally pay benefits (lump sum, dependant’s pension or both) on the death of an employee in service, are often provided, when the employer has no pension scheme or pensions are provided through a GPPP or a stakeholder scheme. The survivors’ benefits exemption in art 10 of TUPE almost certainly does not apply in the case of stand-alone life assurance only schemes, as a result of the (probably unintended) effect of s255 of the Pensions Act 2004 (activities of occupational pension schemes). As the Pensions Regulator puts it in its guidance on lump sum death benefits: Ref: PN06-24, Friday 30 June 2006: “..it's clear that following the amendment of the definition of 'occupational pension schemes' and following s255 of the Pensions Act 2004, such schemes are no longer considered to be occupational pension schemes ..”[i].
Therefore, it is prudent to assume that, if death in service benefits are provided by a stand-alone life assurance scheme, they pass under TUPE. Apart from the legal argument, it is good HR practice, if the transferor had such a scheme, to arrange for life cover to be provided by the receiving employer on completion to avoid the grieving widow syndrome, which is the risk that an employee will die just after completion and the new owner of the business or the contractor will arrive at work the next morning to find the grieving widow with babe in arms waiting at the office to know how much she will get.
alternative pension scheme
Sections 257 and 258 of the Pension Act 2004 altered the effect of TUPE 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 regulation 10 of TUPE remains in force. However the transferee will be required to provide pension rights to transferring employees who, immediately before the transfer were or could have been or become an active member of the scheme.
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 (no more that is necessary to satisfy the "reference scheme" test, which is what must be provided to contract out of a salary related scheme) or money purchase, regardless of the kind of scheme that the transferring employee belonged to before the transfer.
If the transferee's occupational scheme is money purchase, the transferee's obligation, as with a stakeholder scheme, is to make 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.
Anomalously, transferring employee A, who had been a member of the transferor’s occupational pension scheme to which the employer paid contributions at the rate of 10%, cannot require the new employer to pay more than 6%, whilst transferring employee B, who had a personal pension scheme to which the employer paid at the rate of 10%, can require the new employer to continue to pay at the 10% rate.
public sector - Fair Deal for Pensions and the 2007 Direction
When local and other public authorities outsource services, they do so normally by making a contract with (usually) a private sector business or a charity or similar for the for the service to be provided by the latter: see paragraph under “TUPE basics” above. A major concern to the Government and public sector unions (but not necessarily to the private sector contractors) was that the exemption of mainstream pension benefits from TUPE would result in the transferring employees, many of whom are in relatively low paid work, losing one compensating valuable benefit, membership of a public sector pension scheme, as a result of an act over which they have no control.
This was (or was intended to be) remedied by the Fair Deal for Staff Pensions guidance first issued by the Office of the Deputy Prime Minister in June 1999, which required contracting authorities to impose on contractors an obligation 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 the Fair Deal guidance is that it is not statutory, and its application and enforcement can be patchy. If a public authority has a pressing need to outsource a particular service, the bidding contractor senses that it can drive a hard bargain and the local trade union branch is compliant, the guidance could be totally ignored, or a lower standard of pension offered. Sometimes the pension obligation, although imposed on the first contracting-out of a service, is overlooked on a subsequent transfer of the contract by the original contractor.
The Local Government Act 2003 gave power in sections 101 (staff transfer matters: general) and 102 (staff transfer matters: pensions) to make provisions, such as those in the Fair Deal guidance, statutorily enforceable in the case of best value authorities, but, although draft directions had been issued under these sections in 2004 and 2005, no action was taken until a direction was issued by the Department for Communities and Local Government in June 2007.
The direction applies to TUPE transfers by only best value authorities, as defined in the LGA 1999, and not to other public sector employers, such as the Civil Service and the NHS.
the effect of the 2007 direction
On a first contract, the contract by a best value authority and the contractor must provide that:
- the contractor secures pension protection for each transferring employee (ie transferring under TUPE); and
- the provision of pension protection is enforceable by the transferring employee.
On a subsequent contract, (eg where the original contractor transfers the contract to another or otherwise ceases to perform it), the contract between the authority and the subsequent contractor must provide that:
- the subsequent contractor secures pension protection for each transferring employee; and
- the provision of pension protection is enforceable by any original transferring employee (ie who had transferred under the first contract).
“Pension protection” is secured for the transferring employee if, after the change in employer, he has, as an employee of his new employer, rights to acquire pension benefits and those rights are the same as or broadly comparable to or better than (in the case of a first contact) those that he had, or had a right to acquire, as an employee of the authority and (in the case of a subsequent contract) those that he had, or had a right to acquire, before the latest change of employer.
Therefore, although TUPE is not altered, the practical effect of the direction is that employees transferring under TUPE bring with them their pension rights or rights broadly similar to them.
service or sale?
Not every transfer from the public to the private sector is the outsourcing of a service. If, let’s not spoil the example by asking why, a local authority runs a sweetshop for profit (selling materials to rot children’s teeth is not generally considered to be a service) and decides to dispose of it by a sale or lease, the disposal, assuming that the sweet shop was not carried on by a company, the shares in which could be sold, would be simply that – a sale or a lease. It would probably be a TUPE transfer, but it would not be an outsourcing of a service and therefore, this example should be obvious, Fair Deal and the 2007 direction cannot apply and the normal TUPE and PA 2004 ss 257,258 would apply.
The same principle could apply however to, say, a children’s home. If the reality of the transaction is that the LA simply ceases to carry on the children’s home activity and henceforth it is a purely private business, not carried on for the LA or in any way accountable to it (other than for any of the LA’s regulatory functions), it is arguable that this transaction too is not the outsourcing of a service, and again Fair Deal and the 2007 would not apply. Where the boundary lies between outsourcing and disposal’s is still being explored.
changing contract terms
Unless a 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, depending on 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, may be able to obtain the result of altering employment contracts 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 apply 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 (actual or, by ss(5), deemed): Employment Rights Act 1996, s203. Regulation 18 of TUPE states that s203 of the 1996 Act applies in relation to these regulations in TUPE as if they were contained in that Act.
The following pension rights are not in the TUPE regulation 10 exemption and, because they pass under TUPE, they are subject to the contracting-out restriction:
· rights in connection with personal pension schemes;
· the so-called Beckmann rights; and
· (probably) rights in stand-alone death in service schemes.
The following pension rights are not subject to the contracting-out restriction because, although given to mitigate the impact of the TUPE regulation 10 exemption, they are not rights under TUPE or the ERA 1996, and therefore normal contract principles apply:
· pension benefits in accordance with Fair Deal or the 2007 Direction; and
· pension benefits given under ss 257 and 258 of the Pensions Act 2004.
· Each transaction needs to be examined to ascertain into what category it falls and what are the consequences. The main divide is between outsourcing by public sector bodies and by the private sector. Only the former involves the likelihood of having to match public sector salary related pensions. Even in the public sector there is a divide between best value authorities and others, whose significance is that the former, mainly but not only, local authorities are subject to the 2007 Direction, while the latter, eg the Civil Service and the NHS are not subject to the Direction.
· My final point is that what I have written is about the legal issues. What actually happens is affected by much else, such as perversity, incompetence or laziness of the parties in recognising and enforcing rights, the strength or weakness of any trade unions representing the transferred employees, the respective bargaining strengths of the parties, HR issues and the wish to do the right thing even if not obligatory.
copyright Roderick Ramage
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