Peter Davy talks through the confusion surrounding the effect of TUPE legislation on pension provision for transferred workers

For many it will have seemed like an early Christmas present: Last month the government promised in the Autumn Statement to look at the burden posed by the Transfer of Undertakings (Protections on Employment) – or TUPE – regulations.

Six years on from their introduction, and more than three decades after the first iteration of TUPE in 1981, the regulations continue to cause head-aches – and not least around pensions.

Dealing with the transfer of employment rights to the new employer when a business is sold, the regulations theoretically exclude occupational pension rights. In practice, though, it’s rarely that easy.

The last year alone should ensure the consultation has no shortage of issues to look at: conflicts between TUPE and auto-enrolment, reviews of public sector pension transfers, and the first UK court case on the scope of pension benefits covered by TUPE have all kept it a live issue, and thrown up issues of their own. “It is,” admits Aries Pension & Insurance Systems director Ian Neale, “a bit of a can of worms”.

Small mercies
To be fair, recent developments have brought clarity in some respects.

That’s perhaps most true with regard to the government’s review of the Fair Deal policy, under which employees being transferred from the public sector under TUPE must be given a ‘broadly comparable’ pension by their new employer.

The government’s review here has the potential to simplify life, with a consultation response on this issue published in November suggesting transferring staff will be able to remain automatically in the public sector scheme (with their new employer contributing to it, probably at the same rate as the public sector employer). That’s been welcomed by the unions, but also by employers.

“It’s good news because the cost tends to be lower than the cost of an equivalent private sector pension,” says Towers Watson senior consultant Bridget Hall.

The courts, too, have been looking for greater clarity. Earlier this year, they turned to the question of what pension benefits transfer under TUPE.

Generally, pension benefits under trust-based DC or DB schemes are excluded by TUPE. However, there are exceptions in the case of the Fair Deal and in that employees who are members of a contributory occupational scheme must be offered one by their new employer, with matching contributions up to 6 per cent.

The exclusion of pensions from TUPE was also tempered by the European Court of Justice. It decided in the Beckmann and Martin cases early last decade that benefits that weren’t related to ‘old age, invalidity and survivors’ (as TUPE puts it), such as early retirement and redundancy benefits, did transfer. Both those cases, however, concerned public sector pension schemes, leaving a question over whether the same applied to private sector schemes.

That was finally put to rest by the case involving Procter & Gamble earlier this year, which confirmed such benefits could transfer in the private sector. It also put some limit on those rights: any benefits paid after the normal retirement date do not transfer.

Unfortunately, though, in other respects the case creates as many questions as it answers. “The main frustration about the case is that there are so many points that it leaves undecided,” says Pinsent Masons senior associate Mark Baker.

Known unknowns
A large number of uncertainties remain – not least of them how businesses are meant to provide for the liabilities they now face. What is the value of a right to request early retirement, for example? And even where the value of liabilities can be calculated accurately, there is nothing in the way of insurance solutions, for example, in the market to meet them.

Shepherd & Wedderburn pensions partner Andrew Holehouse goes further, arguing that the outcomes are unduly cumbersome: An early retirement benefit for example will have to be paid by the new employer, but only up to the normal retirement date. After that, the responsibility for payments reverts to the original employer. “It’s bonkers to be honest,” he says.

In any case, Svenska Cellulosa Aktiebolaget (SCA), the other party in the Procter & Gamble case, is set to appeal the decision. The final outcome, therefore, is yet to be seen, but not everyone’s hopeful it will be an improvement.

“Personally, I think we might end up roughly where we have been for the past 15 or 20 years; having pointers suggesting that these liabilities may transfer but not actually being clear,” says Mercer partner Adam Rosenberg.

Likewise, with the Fair Deal proposals, it’s yet to be seen how these will work in practice. Uncertainty remains over the fate of ‘second generation’ employees (those already transferred to the private sector) and still to an extent around the exact cost put on providing benefits to transferring employees – how much their new employers will have to pay.

It’s worth remembering, too, that Fair Deal only applies to central government schemes; for now local authority schemes remain under a separate regime. The Department for Communities and Local Government has said only that it will “consider the impact” of the new Fair Deal. At the moment, contractors can participate in local government schemes but particularly smaller ones aren’t keen because at the end of the contract they have to make good any deficit in the pension in one payment – leaving their profits at the mercy of investment performance.

Meanwhile, businesses face new challenges as the result of auto-enrolment. Under that, employers’ minimum contribution rates start at 1 per cent of qualifying earnings, rising to three per cent from late 2018. Under the existing rules for TUPE, however, employees transferring must be offered matching contribution up to 6 per cent of their gross basic pay.

“At the moment you have the potential for a conflict,” says partner Jeremy Goodwin of Eversheds, which first alerted the government to this issue.

In fact, it doesn’t even require a sale to an outside business for a problem to arise; it could just be the result of restructuring within a group. The requirement to increase contributions could apply following a transfer of employees within the same group, warns Capita Employee Benefits technical manager Andrew Short.

“The two sets of legislation don’t fit very well together,” he observes.

Legally, it may be possible to work around that. In practice, it’s likely to at least cause difficulties with staff. As Premier Pensions Management head of consulting services John Reeve says: “The union will ask how it’s fair that you pay these people 6 per cent, but the rest of the employees only 3 per cent.”

Again, the government has promised to look at the problem. To what extent this and the other problems are likely to be resolved as a result of the current reviews is the key question.

Don’t hold your breath
On the one hand, any review of TUPE is unlikely to concentrate on pensions first and foremost. After all, technically, they’re excluded from the regulations.

“The government has bigger fish to fry with TUPE than pensions,” says Neale. There are, for example, serious uncertainties around the provisions in the regulations concerning insolvency that need clarification.

On the other hand, the government’s call for evidence on the effectiveness of TUPE last year, which has prompted the latest consultation, found strong demand for greater clarity around pensions. The current consultation will therefore consider these questions.

Moreover, the current application of the regulations gives rise to some arbitrary outcomes. To take one example, employees under a private sector DB scheme with early retirement rights whose business is sold under an asset deal (where the buyer takes ownership of specific assets of another business) will have a claim for an enhanced early retirement benefit against the new owners, following the Procter & Gamble case. However, if the business is transferred to new ownership under a share deal they won’t, since TUPE doesn’t apply to such deals.

Perhaps more significantly, the current rules do little to help the government either.

There are probably at least two drivers behind the current focus on these issues (in addition to the developing case law). One is the attention as a result of the reforms of public sector pensions. As Holehouse says: “People are now very, very aware of the value of their pensions.”

The other, though, is the govern­ment’s drive to reduce public spending in part by outsourcing more public services to the private sector. At the larger end, uncertainties over the final shape of the Fair Deal policy or transfer of pre-retirement benefits are unlikely to encourage bidders to offer great value.

For smaller businesses and smaller transfers, issues such as the cost of pensions for local authority transferees restrict their ability to bid for projects at all.

“One of the government’s aims is to try to get more SMEs interested in this market,” points out LCP partner Tim Sharples. Such issues are only likely to grow, he adds, since many of the big areas have already being outsourced.

“The drive to get people out of the public sector is going to see the units or groups of people being outsourced become smaller and smaller.”

Making it more efficient for businesses to transfer small numbers of pension scheme members is therefore likely to be a priority. The chances then are that the government will do something.

How much, though, and how soon remains unanswered. Given how long the regulations have been causing difficulty, however, it might be optimistic to expect change in the short term.

If the Autumn Statement is a gift for those dealing with pensions, it’s likely to be some time yet before they’re able to unwrap it.

Written by Peter Davy, a freelance journalist

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