Employee pension rights after a TUPE transfer

Employee pension rights

after a TUPE transfer

June 2006

Contents

• Introduction

• History of TUPE and pensions

• Public sector contracts

• The Pensions Act 2004

• The general principles

• Pension obligations on TUPE transfers - summary

Introduction

From April 2006, the Transfer of Undertakings (Protection of Employment) Regulations 2006 (“TUPE”) will provide renewed protection for UK employees in business transfers. As with the predecessor 1981 Regulations, the protection excludes pension rights in a number of ways. In April 2005, the protection of employees’ pensions in business transfers was expanded by the Pensions Act 2004 (“PA04”). Some employees in former

nationalised industries have special statutory protection for their pension rights which are outside the scope of this briefing note.

The standard TUPE transfer is where an ongoing business is sold from one owner to another. TUPE protection for employees can also be triggered by the creation or termination of a franchise, a merger of

businesses, the beginning or end of an outsourcing arrangement or an internal restructuring within

corporate groups.

Primarily, TUPE issues are concerns for the

employers involved, but sometimes the trustees of any pension scheme involved will have to have some understanding of the extent of and limits to the rights which members have.

History of TUPE and

pensions

On a TUPE transfer, the rights and obligations of the transferor as employer become the rights and

obligations of the transferee, subject to one exception: ongoing membership of any occupational pension scheme. The reference to an “occupational” scheme in the TUPE exception means that rights relating to personal pension, group personal pension and stakeholder plans transfer from the transferor to the transferee.

Separately, European Court of Justice decisions – in the cases of Beckmann and Martin - mean that some

early retirement and redundancy pensions are to

be treated as employer obligations protected by TUPE, even where in the UK they are delivered through occupational pension schemes. Applying TUPE protection to these rights is very difficult if the new employer does not have a pension scheme which is similar to the old employer’s. In particular if employees retain deferred rights in the old

employer’s scheme the new employer should be able to pay less to an employee who is made redundant. In practice, it may be difficult for the new employer to obtain the information needed to perform such calculations. As the rights are protected by TUPE they cannot easily be amended by variation of employment contracts.

These are complex issues and where early retirement or redundancy pensions are provided by the old employer both parties will need specialist advice. The full implications of these court decisions, which related to the NHS Superannuation Scheme, remain unclear in relation to private sector transactions.

Public sector contracts

Where a central government body awards a contract which involves a transfer of employees from the public to the private sector, guidance notes and policies set a higher standard than TUPE and PA04.

It is the sponsoring department’s responsibility to ensure that the contract discharges its duties and places responsibilities on the contractor to reflect:

• the Fair Deal for Staff Pensions guidance (“Fair Deal”); and

• the Code of Practice on Workforce Matters in Public Sector Service Contracts (the “Two Tier Workforce” guide).

Under Fair Deal, the private sector employer taking on the public sector employees must offer the employees a final salary scheme which provides benefits, certified by the Government Actuary’s Department, which are materially at least as good as those provided under the public sector pension scheme. Transferring employees must also have the opportunity to transfer their past service rights as part of a bulk transfer process.

New employees employed by the private sector employer after the transfer date will get protection under the Two Tier Workforce guide if they are employed to work alongside the employees transferred from the public sector.

Under the Two Tier Workforce Guide, they must be offered employment on fair and reasonable terms and conditions which are, overall, no less favourable than those of transferred employees. Pension benefits offered to new employees must meet a minimum level,

although need not be the same as those offered to the transferred employees so long as their overall

package of remuneration is no less favourable. The minimum level of pension benefit is either a

contracted-out final salary scheme or a money purchase scheme or arrangement with 6% employer contributions available.

The Pensions Act 2004

From 6 April 2005, PA04 and accompanying regulations created pension obligations applying to new employers following TUPE transfers where the old employer sponsors an occupational pension

scheme. PA04 does not apply to a TUPE transfer

which is purely an internal restructuring within an employer group.

Every employee who is in or entitled to join the old employer’s scheme will have statutory pension

rights immediately after the transfer and these will be

enforceable against the new employer. The new employer will have an obligation to offer pension benefits in respect of service after the transfer. It is not only employees who are building up pension rights in the old employer’s scheme who are protected by the PA04 but also:

• _{employees who transfer during a waiting period,}

that is, who will be entitled to join the scheme once they have completed, say, 12 months’ service; and

• transferring employees who are entitled to death

benefits only under the scheme where the same

scheme also provides benefits on retirement. This applies even if the scheme is closed for building up new pension rights.

In setting the level of the new statutory rights created by TUPE transfers, the Government had to choose between making a few broad rules apply across the board, or making a tailored and intricate web of rules to fit all different pension schemes and benefit systems. The Government chose the general principles option.

The general principles

main type of pension scheme (final salary and money purchase) rather than a more tailored approach. This makes it easier for the new employer to provide one scheme for all employees, if preferred.

• The new employer can provide a final salary or other defined benefit scheme, an occupational money purchase scheme or access to a

stakeholder pension scheme. The new employer will not discharge its duty if it only provides benefits under a group personal pension scheme.

• The new employer’s scheme type does not have to match the old employer’s scheme – for instance a final salary scheme can be replaced

by a money purchase scheme.

• _{If the new employer provides a final salary or}

other defined benefit scheme, the scheme must satisfy at least one of three final salary tests:

• the test used for National Insurance contracting out; or

• broadly, the benefits to be provided under the scheme funded by employer contributions must be at least equal to 6% of the employee’s pensionable pay and any mandatory employee contributions must not exceed 6% of pensionable pay; or

• the employer must match employee contributions up to 6% of basic salary. If the new employer provides a money purchase scheme a single minimum standard will apply to occupational schemes and stakeholder schemes. This minimum standard will be that the new employer must

match employee contributions up to 6% of basic

salary. This is the same as the standard applied under the Two Tier Workforce guide.

In some cases the obligation on the new employer will be greater than that which existed before the transfer. Take for example where the old employer promised to match its employees’ money purchase contributions to its scheme up to 4% of pay. After a TUPE transfer, that automatically becomes a duty on the new employer to match contributions up to 6% of pay. Of course, employees in some transfers would be worse off. Take an example of the old employer having a duty to match contributions up to 8% of pay and an employee contributing 8% before the transfer.

After the transfer, the employee would only have the right to receive a contribution of up to 6% of pay from the new employer.

On transfer, the new employer’s pensions duty becomes a condition of each transferring employee’s contract of employment. However, the pension rights created by PA04 may be varied at any time after the transfer by agreement between the employee and the new employer.

As these pension rights are contractual rights, any failure by the new employer to comply with its pension obligations under PA04 would amount to a breach of contract and an employee could claim for any loss flowing such a breach. Where the breach is

fundamental, an employee could respond by resigning and bringing a claim for wrongful and unfair dismissal. Importantly, there is no regulatory enforcement of these new rights under PA04 against a new employer who fails to discharge the obligation to provide pensions after a transfer.

Old employer’s

scheme

Scheme Benefit

New employer’s obligations

Final salary scheme Normal retirement benefits Must provide pension benefits. Unless Fair Deal applies, employer chooses whether to offer final salary or money purchase benefits. Minimum standard set for each type. Final salary scheme Will be entitled to join after

waiting period of further service

Must provide entitlement to build up pension once the waiting period is completed. Unless Fair Deal applies, employer chooses whether to offer final salary or money purchase benefits. Minimum standard set for each type.

Final salary scheme Early retirement benefits Must provide similar benefits, although there are practical difficulties.

Money purchase occupational scheme

Entitlement to join with employer contributions

Must provide pension benefits. Employer chooses whether to offer final salary or money purchase benefits. Minimum standard set for each type.

Money purchase occupational scheme

Will be entitled to join after waiting period of further service

Must provide entitlement to build up pension once the waiting period is completed. Employer chooses whether to offer final salary or money purchase benefits. Minimum standard set for each type.

Personal pension arrangement (inc. GPP)

Entitlement to join _{Must provide the same entitlement}

_.

arrangement (inc. GPP)

Employer contributions Must provide the same entitlement on the same conditions (if any). No separate obligation to match contributions or provide up to 6%. Stakeholder pension

arrangement

Entitlement to join _{Must provide the same entitlement}

_.

arrangement

Employer contributions Must provide the same entitlement on the same conditions (if any). No separate obligation to match contributions or provide up to 6%.

Field Fisher Waterhouse has a dedicated pensions team advising on all aspects of corporate transactions in the private and public sector and on day-to-day scheme advisory issues including compliance with the Pensions Acts 1995 and 2004 regulatory regimes, Government pension reform and tax simplification, scheme wind-ups, deficit counselling, scheme design and restructuring.

Belinda Benney

David Gallagher

Contacts

Field Fisher Waterhouse LLP 35 Vine Street London EC3N 2AA

t. +44 (0)20 7861 4000 f. +44 (0)20 7488 0084 info@ffw.com www.ffw.com

This publication is not a substitute for detailed advice on specific transactions and should not be taken as providing legal advice on any of the topics discussed.

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