TUPE transfers and pensions

Outsource iStock 000007727531XSmall 146x219Long-established case law setting out which rights relating to pension benefits do/do not transfer on a TUPE transfer has been re-considered in the High Court, writes Jacqui Piper.

Judgment was handed down in the case of Procter & Gamble v Svenska Cellulosa Aktiebolaget & another on 14 May 2012.

This case related to the Procter & Gamble Pension Fund and the sale in 2007 by Procter & Gamble of its European tissue towel business.

The main consideration was whether certain rights under the pension fund transferred by operation of the Transfer of Undertakings (Protection of Employment) Regulations 2006 (TUPE).

TUPE background

TUPE applies to a transfer of all/part of an undertaking or business situated in the UK. Generally, provisions of an occupational pension scheme relating to old age, invalidity or survivors (‘old age benefits’) will not transfer.

However, in Beckmann v Dynamco Ltd [2003], and Martin and Others v South Bank University [2004], the European Court of Justice (ECJ) held that rights to certain early retirement benefits within an occupational scheme fell outside the TUPE exemption relating to old age benefits, so they transfer.

It is common on a TUPE transfer for the vendor to provide the purchaser with an indemnity in respect of future liability which might arise from these transferred rights to early retirement benefits. This case was, perhaps, unique in that an indemnity was offered but not accepted. No explanation was given, but there was a mechanism for adjusting the purchase price to take account of such liabilities, and this was the issue under consideration.

The Pensions Act 2004 gave additional rights to members and prospective members of occupational pension schemes on a TUPE transfer. A new employer must now provide access to either a defined benefit scheme (meeting a prescribed minimum standard) or a money purchase scheme, to which the employer matches member contributions up to 6%.

In addition, individuals who are (or have been) members of the LGPS who transfer under TUPE must generally be offered pension benefits that are at least the same as, or broadly comparable to, those within the LGPS.

The case

The case was brought before the High Court in order to establish:

  • whether the provision for the early retirement benefits offered in the pension fund constituted an obligation that transferred to the purchaser under or pursuant to TUPE, and if so
  • whether that obligation so transferred constituted a liability for the purposes of the sale and purchase agreement to be taken into account when calculating any purchase price adjustment.

The issues

The fund made provision for certain early retirement benefits which differed between active members and deferred members.

Transferred members became deferred members in the fund and, as a result, lost the following ‘enhancements’:

  • the potential to accrue additional service to bring them up to 15 years’ continuous service - members who retired having completed 15 years’ continuous service received more generous reduction factors on early retirement
  • the possibility of taking early retirement from the age of 55 (with employer consent) and taking a ‘bridging pension’ between the date of retirement and State Pension Age.  

Transferred members did not lose any of their accrued benefits and they remained entitled to a deferred pension from the fund.

Questions raised in the case

Three questions were raised:

  1. Had the members’ rights to receive the early retirement benefits transferred under TUPE?
  2. Did liability for all the early retirement benefits, or only liability in respect of the enhancements, transfer under TUPE?
  3. Did the enhancements fall within the scope of ‘old age benefits’?

Question One

Hildyard J held that TUPE is not confined to contractual liabilities, but extends to "rights and obligations" and "rights, powers, duties and liabilities" arising from a contract of employment/employment relationship or "under or in connection with" a contract of employment.

He concluded that a pension scheme "is an arrangement in connection with a contract of employment".

The vendor argued that the employer had the power within the Fund’s rules to amend or terminate the early retirement benefits and, in any event, they were discretionary benefits (i.e. subject to employer consent). Accordingly the provision in the fund’s rules was not a right or obligation; or a right, power, duty or liability so neither the benefit nor the burden transferred.

However, this argument was contrary to the decision in the Martin case which held that rights which were contingent upon dismissal or the grant of early retirement by agreement with the employer were rights and obligations. In that case, the ECJ held that a right or obligation to a benefit falls within the scope of TUPE notwithstanding that its implementation may be discretionary.

Having accepted this position, the vendor then argued that the ‘right’ was not to be given the early retirement benefits but to apply for them and to have that application properly considered. This was agreed by the parties in the absence of any long standing and settled practice adopted by the employer.

Hildyard J said that this was consistent with TUPE’s objectives; of safeguarding transferring employees’ interests by vesting the discretionary power to provide early retirement benefits in the management of the entity that employs them.

Question Two

This was known as the "smiling pensioner" or "double pension issue" point. The question was whether, having already become entitled to a deferred pension from the fund, the transferring members would also have a right under TUPE to claim from the purchaser pension benefits which (together with the enhancements) duplicate those deferred pension benefits (hence the smiling pensioner!).

It was argued by the vendor that TUPE must be interpreted as "safeguarding and maintaining" employees’ rights – not duplicating or enhancing them. In contrast, the purchaser argued that the obligation to ensure full funding of members’ interests (including any vested deferred pension benefits) would pass to the purchaser. The purchase price adjustment would have been significantly (up to £19m) higher if the purchaser’s argument was accepted.

Hildyard J decided that such duplication of liability could not have been intended under TUPE and that only liability for the enhancements transferred – the liability for the early retirement benefits themselves remaining with the vendor.

This is a sensible conclusion; it is difficult to see how a court could conclude otherwise.

Question Three

The purchaser argued that: “Beckmann and Martin provide clear guidance as to the scope of the ‘old age benefits’ exclusion”.

However, the vendor submitted that neither case was directly on point. Hildyard J set out what the relevant questions were in each of these cases:

  • Beckmann – “Is the employee’s entitlement to early payment of pension and retirement lump sum and/or the annual allowance and lump sum compensation, a right to an old-age, invalidity or survivor’s benefit?”
  • Martin – “Is the employees’ entitlement to the payment of early superannuation benefits and lump sum compensation on redundancy/in the interest of the efficiency of the service/on organisational change, a right to an old-age, invalidity or survivor’s benefit?”

Both cases therefore concerned benefits triggered by early retirement on redundancy and which were payable only until normal retirement age. They were therefore distinct from this case as here the questions related to benefits which were partly payable after normal retirement age.

Hildyard J said that the question must be whether benefits first triggered as early retirement benefits must be treated as such even after normal retirement age or "whether, in other words, a restrictive interpretation requires a rule that 'once an early retirement benefit, never an old age benefit'."

His conclusion was that to give such a restrictive interpretation would be counter-intuitive. He considered it "plain and obvious" that pension instalments payable after normal retirement age are old age benefits, irrespective of the fact that the pension first came into payment prior to normal retirement age. As such they would not transfer under TUPE.

This may have odd consequences. If a transferring scheme provides for early payment of a member’s old age benefits, then the effect of the judgment is that those benefits must be provided on early retirement but there is no need for them to continue after normal retirement age.

Ordinarily, a pension, once in payment may not be reduced unless provision has been made for all members’ pensions to be reduced or the pension is a "bridging pension" designed to take account of the basic state pension which is payable from State Pension Age.

Other arguments which were not considered

A couple of points were mentioned, but not considered, by Hildyard J:

  • that the application of Beckmann and Martin should be confined to the context of public sector schemes
  • that, in the context of a private sector scheme, the obligation to pay benefits lies with the trustees and not directly with the vendor.

The judge said that to answer them would require referral to the ECJ, but judgment had been reached without the need to do so. Clarity on these points would be welcome.

Summary

This case confirms what we already knew about pension rights and TUPE, and gives further detail.

In most cases the vendor will provide some form of indemnity against Beckmann and Martin issues although the adjustment to the purchase price achieves a similar aim – namely protecting the purchaser from the liabilities imposed by TUPE.

What this case demonstrates is that it should be clearly agreed what is intended to be covered by any provisions in the agreement.

Jacqui Piper is an Associate at Shoosmiths. She can be contacted on 03700 868412 or by This email address is being protected from spambots. You need JavaScript enabled to view it..