UK: Pension Rights And TUPE: What Actually Transfers?

Last Updated: 6 July 2012
Article by Justin McGilloway

Following on from our April 2012 e-bulletin where we examined the Pension Ombudsman's attitude to so called Beckmann liabilities, the High Court has for the first time considered this issue in its recent decision in the Procter & Gamble case1.

Beckmann liabilities refer to rights to early retirement or redundancy benefits which transfer with employees under the Transfer of Undertakings (Protection of Employment) Regulations 2006 ("TUPE").

The General Rule

Rights under or in connection with an occupational pension scheme do not transfer under TUPE. However, this exclusion only applies to pension benefits that relate to 'old age, invalidity or survivors'.

The ECJ held in the Beckmann case2 that redundancy benefits could not be classed as 'old age benefits' because they were not paid at the end of normal working life and therefore fell outside the TUPE restriction (i.e. such rights transferred on a sale). In another case (Martin3), it was decided that early retirement benefits fell outside the pensions restriction where an employee had reached a certain age and early retirement arose by agreement between the employer and employee.

Both these cases and the precedents which they have laid down have significant implications for commercial transactions, with purchasers often negotiating indemnity protection to cover such potential liabilities. However, the precise scope of Beckmann liabilities has until now not been considered by the UK courts.

The Procter & Gamble ("P&G") case

This case considers these issues in the context of a purchase price adjustment to cover potential liabilities.

The case concerned an asset sale of P&G's European tissue towel business. The transaction included a TUPE transfer of 129 P&G employees based in Manchester to a purchaser, Svenska Cellulosa Aktiebolaget ("SCA"). The transferring employees were active members of the defined benefit section of the Procter & Gamble Pension Fund (the "Fund"). The parties knew that certain early retirement rights under the Fund may transfer to SCA. Normally such potential liability is addressed by way of indemnity but in this case a price adjustment mechanism was negotiated. Under this mechanism SCA would benefit from a reduction in the purchase price (calculated using an actuarial formula) to reflect any liabilities and benefits accrued under the Fund before the transfer to it under TUPE – i.e. any accrued Beckmann liabilities.

The parties view of the adjustment varied significantly – P&G's actuaries said it was zero, while SCA's actuaries assessed the exposure to Beckmann liabilities at £19m. A dispute arose and the case reached the High Court.

Decision

The Honourable Mr Justice Hildyard decided that:

  • an early retirement or redundancy right (described by the Judge as 'enhancements') could transfer under TUPE. TUPE does not just relate to contractual liabilities, but also covers 'rights and obligations', and
  • 'rights, powers, duties and liabilities' which arise from a contract of employment/employment relationship;
  • if such benefits were discretionary or needed employer consent, these also transferred;
  • the liability transferring under TUPE was the liability to provide the enhancements only – not the full early retirement benefits. A member cannot make a double recovery by claiming entitlement to a full early retirement pension from the buyer too;
  • only benefits payable over the period from retirement up to the normal retirement (NRD) can transfer, not any benefits payable from or after NRD; and
  • for benefits payable after NRD it was "plain and obvious" that pension instalments paid to a member should be characterised as old age benefits (which do not transfer under TUPE) as the sole purpose of
  • the pension was to support the recipient after retirement. The fact that pension first came into payment before NRD was irrelevant.

Our comments

The decision in the Procter & Gamble case confirms the extent to which rights to early retirement pensions transfer under TUPE. It negates any argument that the Beckmann and Martin cases do not apply to private sector pension schemes and confirms that conditional early retirement benefits (e.g. subject to employer consent) are also capable of transferring.

However, the case throws up new questions of its own:

  • How will the purchaser exercise its role in the seller's scheme to give its consent?
  • How would a purchaser pay an enhancement in the seller's scheme without falling foul of the Finance Act 2004 "authorised payment" regime?
  • How are early retirement rights to be valued?

We understand that the case is to be appealed by SCA and no doubt these and other questions will be considered further. In the meantime it is imperative for purchasers considering a business acquisition to be fully aware of potential pension liabilities, and at the very least seek an indemnity for Beckmann liabilities.

Footnotes

1 The Procter & Gamble Company v Svenska Cellulose Aktiebolaget SCA and another [2012] EWHC 1257 (Ch)

2 Beckmann v Dynamco Whicheloe Macfarlane Ltd [2002] IRLR 578

3 Martin v South Bank University [2004] IRLR 74

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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