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Pension rights after a TUPE transfer

The legislation governing transfers of employment originally attempted to exclude pension rights from the scope of a transfer under the Transfer of Undertakings (Protection of Employment) Regulations 2006 (TUPE). Regulation 10 of TUPE states that the general employment protection provided on a TUPE transfer does not apply to “so much of a contract of employment or a collective agreement as relates to an occupational pension scheme”. The regulation states that rights that do not relate to “old age, invalidity or survivors’ benefits” are not treated as part of that scheme. So far, so simple – the pension scheme stay with the transferor. But then the European Court of Justice decisions of Beckmann and Martin came along.

These cases held that rights payable before normal retirement age (namely, pension rights arising on early retirement or redundancy) were not “old age, invalidity or survivors’ benefits” (because these rights were payable before old age) and therefore did transfer under TUPE. The result appears counterintuitive: the liability to pay a funded pension promise can transfer to the new owner of a business, who may not themselves have a pension scheme from which to meet these costs. Let’s take the example of a transferred employee who has a claim for early payment of a pension turned down from the transferor (eg because early payment was subject to employer agreement). In those circumstances, it would be possible for the employee to bring a claim against the transferee on the basis that the early retirement right had also transferred with their employment under TUPE.

There has only been one further case (Procter & Gamble) that added some demarcation to how Beckmann and Martin liabilities operate in practice. Procter held that the liability to provide full early retirement benefits does not transfer under TUPE – only certain ‘enhancements’ did (ie the element of the pension that would be payable before normal retirement age). The case settled before appeal, so, for now, if the transferring employees have early retirement rights/pension rights on redundancy under an occupational pension scheme, the new employer could still be on the hook for a portion of the early retirement pension.

Tips for employers

When dealing with employees who are in scope to transfer under TUPE and who may have rights under an occupational scheme, employers should:

  • identify what rights under the scheme they may have that do not constitute “old age, invalidity or survivor’s benefits”;
  • cost the extent of these liabilities with input from an actuary; and
  • if appropriate, seek mitigation from the transferor (eg a price adjustment in relation to the transfer/a full indemnity from the transferor).

The Martin/Beckmann issue also only relates to past service pension benefits, not the basis on which future benefits must accrue. The Transfer of Employment (Pension Protection) Regulations provide that, where an employee is a member of an occupational pension scheme and is subject to a TUPE transfer, their new employer must, as a minimum, provide them with access to a defined contribution (DC) arrangement to which the employee may make matched contributions of up to 6 per cent of salary (this is separate to the operation of auto-enrolment, which requires compulsory contributions to be paid but at a lower rate).

This does offer a degree of protection, but in practice can produce some odd results. For example, an employee in a defined benefit scheme will only receive DC benefits for future service, but an employee in a DC arrangement will be entitled to receive the same level of contributions going forward – or better. If changes are being proposed under a TUPE transfer, they should be clearly explained as part of the information and consultation requirements with affected employees and also clearly set out in the measures letter provided before transfer.

The Fair Deal 2013 gives public sector employees who are TUPE transferred out the right to remain in the same pension arrangement as before, and the ability to enforce that right against their new employer. The consequence is possible exposure for employers to Martin/Beckmann liabilities, funding issues and potential exit debts when the outsourcing agreement ends and the employees TUPE transfer back. The application of Fair Deal is complicated; however, if your business is involved in transactions involving public sector staff, employers should seek early pensions advice so the cost of participating in a public sector scheme can be priced into the contract and consideration can be given to managing any pension liabilities that a business may inherit.

Andrew Campbell is a partner and head of pensions at Doyle Clayton

Added: 16-08-2017
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