UK: High Court Rules In Cases On TUPE Pension Liabilities

Last Updated: 1 August 2012
Article by Mark Howard, Judith Donnelly and Paul Hodges

The High Court has recently considered two cases concerning pension benefits provided following a transfer of employees under the Transfer of Undertakings (Protection of Employment) Regulations 2006 (TUPE).

Procter & Gamble v Svenska Cellulosa Aktiebolaget

This case concerned the sale by P&G of its European tissue towel business to the Swedish company SCA. The employees were members of the P&G Pension Scheme, which was a defined benefit scheme aiming to provide a pension equal to 2% of final pensionable pay for each year of pensionable service.

Active members of the scheme had the right to retire at 55 with the employer's consent. On doing so, they were entitled to receive a bridging pension until state pension age – that is, a temporary pension payable until the state pension becomes payable. An actuarial reduction applied to the main part of their pension to reflect the early payment, but members with 15 years' service were entitled to more favourable terms.

Deferred members of the scheme – that is, former employees – were also able to retire early, but only from age 60. Members who had accrued 15 years' service benefited from the same favourable terms as active members.

The general effect of TUPE is that the employees assigned to the business or activities transferred will automatically become employed by the company receiving the business or activities on the same terms as they had previously been employed by the transferor company. However, TUPE contains an exception providing that the employees' rights will not transfer where they constitute rights under an occupational pension scheme relating to "benefits for old age, invalidity or survivors".

The European Court of Justice (ECJ) had previously held in Beckmann v Dynamco (2003) that enhanced early retirement pensions payable in the event of redundancy do not fall within the exemption because they do not relate to the end of the employee's working life and could not therefore be "old age" benefits. A subsequent case of Martin v South Bank University (2004) indicated – although not clearly – that the same approach would apply to any early retirement pension. This therefore meant that some pension rights would transfer under TUPE, and these are commonly referred to as "Beckmann/Martin rights". However, both the Beckmann and Martin cases settled before they were heard again by the High Court following the ECJ rulings, so there has been uncertainty as to exact scope of Beckmann/Martin rights.

On the sale of the tissue business, the transferring employees became deferred members of the P&G Pension Scheme. As a result they lost two benefits, which were referred to as "the Enhancements". First, the possibility of taking early retirement from 55 with the employer's consent, and with it the possibility of drawing the bridging pension to age 65. Second, those who did not yet have 15 years' continuous service lost the possibility of attaining that length of service and the enhanced early retirement benefits that went with it.

In the Asset Sale and Purchase Agreement between P&G and SCA, it was agreed that there would be an adjustment to the purchase price to take account of the Beckmann/ Martin rights. This is slightly unusual: more commonly, an indemnity from the seller to the buyer, providing the buyer with protection in the event of a claim by a transferring employee, would be provided, with negotiation over how far the indemnity would extend.

SCA's actuary valued the liabilities transferring at £19 million. P&G's actuary valued the liabilities at zero. With such a difference in starting point, it was perhaps inevitable that no compromise would be found.

Three questions fell to be decided:

1. Had transferring employees' rights and P&G's obligations transferred under TUPE?

Initially, P&G argued that none of the employees' early retirement benefits were contractual – they were conferred by the pension scheme's rules rather than by any contracts of employment – so they simply did not pass under TUPE. The pensions clauses of TUPE, however, refer to rights "under or in connection with any [employment] contract" and it was conceded at the hearing that TUPE would cover the rights under an occupational pension scheme that are "connected with" the employment contract even if they do not form an integral part of the contract itself.

P&G then fell back to the position that the early retirement rights were discretionary because they required the employer's consent. All that transferred under TUPE was the right to have an early retirement application properly considered by the employer (in line with the implied duty of trust and confidence). The judge accepted this argument. However, it did not help P&G because the judge went on to conclude that the Asset Sale and Purchase Agreement contained a mechanism by which those rights were capable of being valued. The Asset Sale and Purchase Agreement referred to assumptions under US accounting principles, which in turn included reference to assumptions as to numbers taking early retirement.

2. Did liability for all of the early retirement benefits, or only liability in respect of the enhancements, transfer under TUPE?

This was the crux of the difference in calculations by the actuaries. SCA's actuary had valued the full cost of early retirement pensions without making any allowance for the deferred pension to which they remained entitled from the P&G Scheme, and also without drawing any distinction between the pension paid up to normal retirement age (NRA) and the pension paid after NRA.

The essence of this question was whether a transferring employee – entitled to a deferred pension in the P&G Scheme – was also entitled, as a result of TUPE, to claim from SCA pension benefits (including the Enhancements) which would substantially duplicate the deferred pension benefits. The implication would be that P&G would have to pay for both of these pensions: once through its funding of the P&G Pension Scheme, and also by reimbursement of SCA under the price adjustment mechanism.

SCA argued that the effect of TUPE would be to transfer an obligation to fund the P&G Pension Scheme to SCA. However, the difficulty with this analysis was how it would fit with P&G's obligation to the Trustees both under the P&G Scheme Rules and under the Pensions Act 2004. SCA argued that P&G's obligation to fund would be extinguished to the same extent, but the judge was unconvinced. He agreed with P&G that the early retirement benefits – except for the enhancements – were discharged by the provision of a deferred pension from the P&G Scheme. It followed that the only obligation to transfer was the Enhancements. There would be no "smiling pensioner" who could effectively claim twice the pension benefits.

The implication for the case is that the £19 million valuation of liabilities by SCA's actuary is likely to be considerably reduced.

3. The meaning of "old age benefit"

As mentioned above, the provision of "old age benefits" from an occupational pension scheme are exempt from TUPE. SCA argued that the payment of the Enhancements – as they would start before the end of the working life – were not "old age benefits" and furthermore could not become old age benefits. SCA argued that the Beckmann and Martin cases determined this issue.

However, the judge disagreed. He considered that there was nothing in either case which meant, for example, a pension being paid to a 100 year old is not an old age benefit simply because by consent of the employer it was initiated at age 64 and not 65. The benefits which would transfer would be those payable from early retirement until NRA and not benefits thereafter.

This would also affect the valuation of the liabilities as SCA's actuary had assumed that the Enhancements would be payable for life and not just to NRA.

Clyde & Co Comment

A key point to note is that this case was concerned with the mechanism for adjusting the purchase price. This means that the judgment provides clarity on some areas, but perhaps is not quite as helpful as it may first appear. We also understand that an appeal may be brought.

The judgment is useful in that it confirms:

  • that any rights to benefits before normal retirement age are susceptible to being transferred under TUPE, including where the right to payment is subject to employer consent. This was thought to be the case
  • that the deferred rights under the transferring employer's scheme are set off against the transferring rights, so there is no double recovery. Again, we thought that this was the case anyway
  • that the rights which transfer are the rights to payments up to NRD. This helps transferee employers, as less liability transfers

However, because the case was concerned with the value of pension benefits at the point of transfer, what it does not decide – because it did not have to – is what the transferee employer has to provide after the transfer. For example, assume that the Beckmann right we are concerned with is a right to an unreduced pension on redundancy in a typical 1/60ths accrual final salary scheme. The transferring employer is made redundant three years after the TUPE transfer. Is the new employer liable to pay a final salary pension based on the additional three years of service and salary at the point of redundancy – less any deferred pension from the transferring employer's scheme (which would be based on service to and salary at the point of TUPE transfer)? This point is not addressed, but the better interpretation of Beckmann and Martin is that this would be the case.

Urenco v Urenco Pension Trustees Limited

This case was concerned with proposed changes to the pension arrangements for employees who had transferred from the Combined Pension Scheme (CPS) provided by the Atomic Energy Authority, and the protections provided under the Energy Act 2004.

The Energy Act is concerned with the decommissioning and clearing up of nuclear sites. It envisaged that responsibility for these tasks would be transferred, under the direction of the Nuclear Decommisioning Authority (NDA) to public bodies or private companies, such as Urenco. The Act contained protections for the pensions of employees who would be transferred as a result. The NDA had to be satisfied that the benefits under the pension scheme of a new employer, and any other benefits from the new employer, were "no less favourable" than the benefits available under the provisions of the CPS immediately prior to the transfer.

In 2008, employees transferred under TUPE from Sellafield Limited (formerly British Nuclear Fuels Limited) to Urenco. The employees ceased to be members of the CPS and became members of the Urenco Pension Scheme. In order to satisfy the requirements of the Act, the NDA obtained a certificate of broad comparability from the Government Actuary's Department (GAD) and undertakings from Urenco about the pension scheme it would provide, which were incorporated in the Sale and Purchase Agreement (SPA).

In 2009, the Urenco Pension Scheme was shown to have a deficit, and two changes were proposed to address the deficit:

  • An increase in members' contributions from 7.5% to 9.5%, and
  • A decrease in the maximum rate of increase to pensions in payment

Both of these changes would adversely affect the future benefits of the employees who transferred from Sellafield Limited. At issue was whether these changes would offend against the protection for the transferring employees contained in the Energy Act.

The case focused on the meaning of the protection in Schedule 8 to the Energy Act. Mr Justice Warren considered the Schedule in great detail, and found that the argument was "finely balanced", but concluded that the Act required a comparison of the provisions of the CPS as they stood at the time of the transfer against the provisions of the receiving scheme – in this case, the Urenco Pension Scheme – from time to time. On that interpretation of the Act, it was conceded by Urenco that the SPA had to be interpreted as preventing the Urenco Scheme from being amended in the manner proposed for the transferring employees.

Clyde & Co Comment

This case is unusual in that it was concerned with a transfer from the public sector where there were specific provisions for protecting pensions in an Act of Parliament. Most outsourcing from the public sector is undertaken under the Fair Deal principles, which are guidelines which public bodies are expected to follow. The ability to change benefits would be governed by the terms of the transfer or outsourcing agreement. Some outsourcings are also subject to the statutory requirements of the Local Government Act 2003. However, the case also illustrates the care that needs to be given when considering restrictions on amending benefits – be they in a scheme's power of amendment, a transfer or outsourcing agreement or an Act of Parliament. Section 67 of the Pensions Act 1995 quite clearly protects accrued rights.

The Pensions Regulator also has power under section 231 of the Pensions Act 2004 to stop accrual in a pension scheme where agreement has not been reached over funding. How would that power interact with pension protection in the Energy Act? We suspect the answer would be that the Regulator's power would override the protection, but to date we understand that the Regulator has not used these powers.

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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