Recent TUPE developments: pension protection

Gareth Brahams, a Partner in the Employment & Incentives Department at Lewis Silkin, looks at the recent increase in the level of protection provided in respect of pensions for employees affected by an outsourcing, merger or acquisition.

Introduction

The Transfer of Undertakings (Protection of Employment) Regulations 1981 (the TUPE Regulations) are designed to protect employees when their employer changes 'from underneath them'.

This typically happens on a merger or outsourcing or when the organisation for which the employee works is sold on. Amongst other things the TUPE Regulations require the new employer to take on all the employees who were assigned to the relevant activity or business before it was outsourced, merged or sold, with continuity of service intact.

The pension exception - the old regime

Until recently, occupational pensions were the one exemption where no protection was provided.

On the other hand employees with an entitlement to an employer contribution to their personal pension scheme, and those who were members of a group personal pension scheme or stakeholder scheme were completely protected by the TUPE Regulations, such schemes not being occupational pension schemes. This position is unaffected by the recent changes.

However, under the old law, staff who benefited from an occupational pension scheme with their old employer, including anyone who had the benefit of a final salary or 'defined benefit' scheme, had no protection to the extent that the scheme related to benefits for old age, invalidity or survivorship

In principle, this appeared to mean that a company that bought the business of another company had to preserve the salaries and all other contractual rights of employees coming under its remit but had no obligation to provide equivalent or indeed any occupational pension benefits. Given that, after salary, pensions are typically the most important benefit that an employer provides, this was a major loophole in the regime.

Pre-existing qualifications to the absolute absence of protection

In order to alleviate this anomalous and unfair position, for some time the Government has made it a provision of its own public sector procurement guidance that bodies to whom government functions are outsourced must provide occupational pension schemes for affected employees that are certified by the Government Actuarial Department to be substantially equivalent to the pension benefits that those employees had previously enjoyed.

Moreover, the European Court of Justice has ruled that early retirement benefits and enhanced pensions on redundancy do not fall within the exemption for occupational pension schemes under the TUPE Regulations because they are not 'old age' benefits.

Accordingly, for a few years it has not been possible for an incoming employer to fail to replicate occupational pension scheme benefits without considerable legal risk.

Relationship between the old protection and the new rules

The new provisions provided by the Pensions Act 2004 and the Transfer of Employment (Pension Protection) Regulations 2005, and in force since 6 April 2005, do not in any way inhibit these inroads into the exemption for occupational pensions under the TUPE Regulations. Rather, they build on them by providing an absolute floor with regard to the obligations of an incoming employer to provide some form of pension entitlement to members of staff who have been transferred from employment in which they were covered by an occupational pension scheme.

Application of the new regime

Essentially the new rules apply where an employee is:

Requirements on the employer

Where the new rules apply the employer has a choice. Either it can admit an eligible employee to its occupational pension scheme where it has one, or it can admit the employee to a stakeholder pension scheme. In either case it must make the contributions set out below.

Admission is necessary only at the same time and according to the same criteria as it would have had to have taken place if the employee had remained with the original employer.

Admitting transferred employees to occupational pension schemes

If an employee is being admitted to the new employer's final salary scheme then, in all likelihood, that will be sufficient to discharge the new employer's obligations. The reason for this is that the only requirement that the employer needs to satisfy in these circumstances is that its own contribution towards the annuity necessary for it to meet its pension promise must be at least 6% of pensionable salary. Typically the lowest rate of accrual in a final salary scheme is 1/80^th - very often it is higher. To fund this kind of promise, an employer will ordinarily have to pay considerably more than 6% of the employee's pensionable earnings into the pension scheme.

If the new employer is admitting the employee to its own defined contribution (or money purchase) scheme it must match the employee's contributions up to 6%.

In neither case can the employer require the employee to contribute more than 6%.

The stakeholder route

If the employer chooses not to admit transferred employees into an occupational pension scheme it must give them the option to join a stakeholder scheme and match employee contributions up to a maximum of 6%. Again the employer cannot require post-transfer employees to put more than 6% of their own pensionable earnings into the stakeholder scheme.

The ability to contract out of the new right

Unusually in relation to an employment law right, an employee is capable of agreeing to give up his or her entitlement to a transferred pension benefit. However, an employee would be unlikely to do this unless, for example, he or she was being offered either membership of a group personal pension scheme or a contribution into his or her own personal pension that was worth the same or more.

Conclusion

Employers inheriting under the TUPE Regulations a workforce that benefited from an occupational pension scheme now not only have to deal with the uncertainties surrounding early retirement benefits, but must also provide a floor of pension provision.

Nevertheless, while employees who previously had the benefit of an occupational pension scheme no longer find themselves completely deprived of the right to a pension following a TUPE transfer, they may still find themselves with a considerably less valuable benefit than they had previously.

Next week's article will outline solutions to some of the practical issues that employers may face in light of the new legislation.

Gareth Brahams is a Partner in the Employment Team at Lewis Silkin (Gareth.Brahams@lewissilkin.com)

Further information on Lewis Silkin can be accessed at www.lewissilkin.com