High Court decisions in the Bradbury v. BBC case and the Procter & Gamble v. Svenska case have further defined the TUPE legislation and the ability of employers to impose caps on increases to pensionable pay, although in both cases important issues remain unanswered, law firm Stephenson Harwood said.

The court cases have shed further light on the extent to which rights under occupational pension schemes transfer under the TUPE legislation and the ability of employers to impose caps on increases to pensionable pay through contractual arrangements with employees, the law firm explained.

In the Bradbury v BBC case, the BBC sought to impose a cap of 1 per cent on the rate at which its employees’ pensionable pay could increase each year. This cap was not introduced by amending the pension scheme rules, indeed the restriction on the amendment power might have prevented such an amendment from being made.

Instead, the BBC sought to implement this policy by making the offer of future pay increases conditional on employees accepting that the increase to their pensionable pay would be capped at 1 per cent.

Mr Bradbury challenged this on the basis that it was inconsistent with the pension scheme rules, that it was contrary to the inalienability provisions of the Pensions Act 1995 and that the BBC had breached its implied duty of trust, confidence and good faith owed to its employees.

The High Court ruled that, although the BBC did not have the ability to implement this cap through the pension scheme’s rules, it was able to offer future pay increases only on the basis that the increase to pensionable pay was capped at 1 per cent. The Court therefore endorsed the well-used practice of employers using contractual agreements with their employees to override the rules of their pension schemes.

It also ruled that the contractual arrangement was not a breach of the inalienability provisions of the Pensions Act 1995. The Act prevents a member of a pension scheme from surrendering a right to a future pension, but the Court held that, in this instance, employees had no right to future salary increases and so cannot have a right to a pension based on future salary increases.

The Court did not rule on the question of whether the BBC had breached its obligations of trust, confidence and good faith because this was an appeal from a decision of the Pensions Ombudsman and the Ombudsman had not considered that issue in his determination.

In the Procter & Gamble v Svenska case it was necessary to determine the value of the pension liabilities which transferred to Svenska under the TUPE legislation, because in the sale contract there was to be an adjustment to the purchase price of an amount equal to the value of those liabilities.

The liabilities in question related to the ability to retire early from the Procter & Gamble scheme, a DB scheme. Employees were only able to retire early with their employer’s consent and would receive an additional bridging pension until state pension age. Employees also obtained more favourable early retirement terms once they had accrued 15 years of service.

Consequently, those employees who were transferred to employment with Svenska lost the ability to retire early from active membership of the Procter & Gamble scheme, thereby receiving a bridging pension. Also, those individuals who had not yet accrued 15 years of service were prevented from doing so and thereby receiving more favourable early retirement terms. These additional benefits which were lost by the transferring employees were referred to as the ‘enhancements’.

The High Court held that, even though the ability to retire early was subject to employer consent, the expectation of being treated fairly and the rights which flowed from obtaining that consent, to the extent they were not old age benefits which do not transfer under TUPE, transferred with the employees to Svenska.

It also ruled that to the extent that benefits which are not old age benefits (and so transferred with the employees to Svenska) were discharged by virtue of the employees becoming deferred members of the Procter & Gamble scheme, Svenska did not need to provide those benefits and did not become obliged to fund those benefits under the Procter & Gamble scheme. Accordingly, only the obligation to provide the enhancements transferred to Svenska.

The Court held that old age benefits are those benefits which are payable from the pension scheme's normal retirement age (NRA). A pension payable for life which commenced before NRA would not be an old age benefit before NRA but it would become an old age benefit at NRA. Consequently, Svenska's obligation to provide the enhancements to the transferring employees ceased when they reached NRA.

In a statement Stephenson Harwood said: “It is perhaps disappointing that the question of whether an early retirement pension payable for life is actually an old age benefit was not argued in more detail. It also remains unclear how Svenska would have to provide the enhancements, assuming of course that it consents to the transferring employees' early retirements. But at least the Court did appear to endorse the view that the previous cases of Beckmann and Martin could be limited to public sector arrangements where temporary pensions paid on redundancy were a contractual right rather than a pension scheme liability.

“In practice, however, purchasers of businesses are still likely to require protection from the transfer of pension liabilities under TUPE and so we may not quite have seen the back of ‘Beckmann indemnities’ just yet.”

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