Transfer of Undertakings (Protection of Employment) Regulations 1981 (TUPE)

The Transfer of Undertakings (Protection of Employment) Regulations 1981 (TUPE) provides that any employee engaged in an undertaking (ie, in loose terms, a business entity) immediately before a transfer of that undertaking will be transferred with the business to the buyer on their existing terms of employment. Historically, an exemption in regulation 7 of TUPE in relation to any rights relating to an occupational pension scheme has meant that receiving employers have not had to worry about any transferring pension rights.

However, two recent pieces of legislation have impacted upon this and limited the extent of the exemption. It should be noted that the new requirements do not amend TUPE, but exist separately and apply in addition.

The Pensions Act 2004 and the Transfer of Employment (Pension Protection) Regulations 2005

On 6 April 2005, the Pensions Act 2004 (“the Act”) came in to force. Sections 257 and 258 of the Act provide that certain rights relating to occupational pension schemes will survive a TUPE transfer. The Act imposes obligations on the receiving employer after a TUPE transfer where there was an occupational pension scheme in place prior to the transfer and:

• the transferring employees were either active members of the scheme, or were eligible to be active members but had not yet joined, or would have been eligible if they had been employed for longer; and

• in the case of money purchase schemes, the transferring employer was, or would have been, required to contribute to the scheme or, in the case of active members, was not required to make contributions but did so.

If transferring employees fall within the above categories then it will be a condition of their employment with the receiving employer that pension protection is maintained for them (Section 258 Pensions Act 2004). However, there is no obligation to provide the same scheme as provided by the transferring employer but simply to provide a benefit that is the same or an alternative permitted by the legislation. The obligations are as follows:

Defined Contribution (or Money Purchase) Schemes

Where a receiving employer opts to offer transferred employees membership of an occupational defined contribution scheme they must make “relevant contributions” to the scheme on behalf of each of their employees who are active members. “Relevant contributions” are employer contributions which match employee contributions up to a maximum of 6 percent of pensionable pay each time remuneration is paid.

Defined Benefit (or final salary) Schemes

Where a receiving employer chooses to offer a defined benefit scheme, the scheme must either:

• provide for members to receive benefits which are of overall equivalent value to those provided by the transferring employer (the equivalent value test); or
• if the transferring employer’s scheme was contracted-out and met the statutory reference scheme test (set out in s12A of the Pension Scheme Act 1993) then, as a minimum, the receiving employer may provide a scheme which meets such requirements.

Stakeholder Schemes

As an alternative, the receiving employer may provide a stakeholder pension, but if they offer this then they must make “relevant contributions”, as they would under a money purchase scheme.

Conclusion

Under s258 of the new Pensions Act 2004, when a TUPE transfer occurs from a transferring employer who provides a pension scheme, the receiving employer must make arrangements to provide for the continuation of pension benefits at a specified level via a defined benefit, money purchase or stakeholder pension.

Pensions remain a complex area in relation to TUPE transfers, further complicated by the ECJ decision in Bedman –v- Dynamo Whicheloe Macfarlane Ltd and Martin –v- South Bank University, which both indicate that some occupational pension scheme rights fall outside of the regulation 7 TUPE exemption and so should transfer to the receiving employer along with the employees other terms and conditions of employment. The new legislation does not address the potential problems raised by these decisions and it remains to be seen how they will be resolved.

For a simple flow chart setting out the legal position click here.

This article is not intended to be a comprehensive review of all developments within the law, or to cover all aspects of the chosen topic. You should take legal advice before applying information contained herein to any specific issue.