Two recent decisions by the European Court of Justice, and new legislation in the form of the Pensions Act 2004, are likely to have a significant effect on the transfer of employee rights upon an asset sale. As a consequence, purchasing companies may find that occupational pension rights are not necessarily excluded from the transfer of an undertaking and they may also now be required to set up occupational pension schemes, or pay into stakeholder schemes upon the purchase. This would result in serious financial implications for asset purchasers. This article summarises the possible implications of the European Court’s decisions and the new legislation.

The ECJ decisions

The original interpretation of the regulations governing employee rights on an asset sale (the "TUPE Regulations") was that occupational pension schemes were excluded from those transferring rights. Employer contributions to personal pensions and stakeholder pensions were the only pension benefits which transferred to the purchaser under the TUPE Regulations.

However, following recent decisions in the European Court of Justice ("ECJ") (Beckmann v Dynamco Whicheloe Macfarlane Ltd and Martin and others v South Bank University) this position has changed. The court decided that early retirement benefits and benefits providing enhancement of early retirement packages did not fall within the category of rights excluded from the transfer of an undertaking.

As a result of these decisions, the position purchasers now find themselves in remains unclear, and further ECJ case law is needed to clarify the situation. The only guidance for purchasers is that provided by the two recent ECJ rulings.

Potentially, these decisions could have the following effects:

  • The only "old-age" benefits which the asset purchaser is not legally obliged to honour are those where the employee has reached the normal retirement age as defined under his pension scheme. The result of the recent ECJ rulings is that early retirement benefits, either when retirement is for reasons of redundancy or otherwise, and those benefits designed to enhance the early retirement pension are transferred along with the undertaking.
  • Any ECJ ruling on the interpretation of national legislation is usually applied retrospectively and so this strict interpretation may have to be applied to all asset transfers which occurred under the TUPE regulations. The result is that liability may arise from transfers which occurred from 1981 onwards.
  • It will be for the purchaser to ensure that employees are accorded early retirement on the terms to which they were entitled under their employment relationship with their previous employer.
  • It will not be possible for the employee to waive these rights, even by consenting to less favourable terms in return for a payment, unless the reason for adopting the new terms can be shown to have no connection to the original asset transfer. In particular, changing employees’ terms of contract in order to align their contracts with the purchaser’s standard terms will be considered as being connected to the transfer.

The Pensions Act 2004

The Pensions Act 2004 (the "Act") received royal assent on 19 November 2004 and is expected to come into force from April 2005. Under the Act, the asset purchaser will be required to give transferring employees who were members of any occupational pension schemes membership of an occupational scheme or allow them access to a stakeholder scheme into which the purchaser will make contributions at a minimum prescribed level. This level has not been specified as yet but previous consultation suggests that it may be 6% of basic salary.

This right will extend to employees who are either eligible to join the scheme but have not yet done so, and those who are not yet eligible due to having insufficient service. The result will be that employees who are not members of the scheme at the time of the asset purchase may not be excluded from benefiting from specified pension rights.

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.