Employees' pension rights on the transfer of an undertaking

Employees' pension rights are an important part of their package of terms and conditions of employment. However, they have always been excepted from the principle that, when a transfer of an undertaking covered by the Transfer of Undertakings (Protection of Employment) Regulations occurs, employees' terms and conditions of employment transfer from the old employer (the transferor) to the new employer (transferee).

Rights under or in connection with an occupational pension scheme were previously excluded by the Transfer of Undertakings (Protection of Employment) Regulations 1981, regulation 7. This exclusion has been carried forward into the Transfer of Undertakings (Protection of Employment) Regulations 2006, which came into force on 6 April 2006. Regulation 10(1) excludes the transfer of so much of an employment contract or collective agreement as relates to an occupational pension scheme within the meaning of the Pension Schemes Act 1993, section 1.

The exclusion of rights under or in connection with an occupational pension scheme is compliant with European law, as it is permitted, although not now obligatory, by virtue of Article 3(4) of Directive 2001/23/EC.

Old age, survivors' or invalidity benefits

Aspects of an employer's occupational pension scheme that do not relate to old age, survivors' or invalidity benefits are not covered by the exclusion, so are liable to be transferred. This is expressly provided for by the Transfer of Undertakings (Protection of Employment) Regulations 2006, regulation 10(2), which states that 'any provisions of an occupational pension scheme which do not relate to benefits for old age, invalidity or survivors shall not be treated as being part of the scheme'. An example of rights under a pension scheme that were not old age, survivors' or invalidity benefits may be found in Beckmann v Dynamco Whicheloe Macfarlane Ltd [2002] IRLR 578 ECJ and Martin and others v South Bank University [2004] IRLR 74 ECJ. The issue in Beckmann and Martin was whether a right to a lump sum and enhanced payment on early retirement through redundancy was a right relative to old age (and therefore excluded by what was then the Transfer of Undertakings (Protection of Employment) Regulations 1981, regulation 7 - and is now the Transfer of Undertakings (Protection of Employment) Regulations 2006, regulation 10), or was not relative to old age and therefore outside the exclusion, ie transferred to a transferee under what is now regulation 4. The European Court of Justice in both cases held that 'old age' means the age at which one would normally retire and does not include early retirement cases. The early retirement by reason of redundancy was therefore not a right relative to old age and transferred to the transferee in both cases.

Restriction to occupational pension schemes

Another issue to note about the Transfer of Undertakings (Protection of Employment) Regulations 2006, regulation 10 is that only an occupational pension scheme within the meaning of the Pension Schemes Act 1993, section 1 is excluded. A personal pension scheme would therefore be considered to be outside the exclusion and would transfer.

Abolition of putative constructive dismissal claim

As the effect of what was formerly the Transfer of Undertakings (Protection of Employment) Regulations 1981, regulation 7 and is now the Transfer of Undertakings (Protection of Employment) Regulations 2006, regulation 10 is to absolve the transferee from the duty to carry on the same rights under an occupational pension scheme that an employee enjoyed with the transferor, it has long been mooted whether or not some kind of residual claim for breach of contract might apply against the transferor. This has never been tested in the courts, but the argument is that if, what is now, regulation 10 excludes pension rights from transfer, albeit that the remainder of the employment contract does transfer, there may be some residual breach of contract claim against the transferor in respect of the pension rights that have been curtailed on the transfer.

Intellectually, this is a very difficult claim to ground. However, the concept was probably the invention of government lawyers who found it useful when arguing that contractors contracting with the Government should put in comparable pension rights for transferring employees notwithstanding the exclusion, in order to remove the risk of a constructive dismissal claim against the Government.

Although the risk of a constructive dismissal claim against a transferor was probably more imaginary than real, the Transfer of Undertakings (Protection of Employment) Regulations 2006, regulation 10(3) now removes the possibility of this claim. It provides that an employee whose contract of employment is transferred cannot bring a residual claim against the transferor for breach of contract or constructive unfair dismissal arising out of a loss or reduction in his or her rights under an occupational pension scheme in consequence of the transfer, unless the alleged breach of contract or constructive dismissal (as the case may be) occurred prior to the date on which the 2006 Regulations took effect, namely 6 April 2006.

Public sector

It should be noted that, in public sector transfers, employers are expected to follow the Cabinet Office Statement of Practice (PDF format) (on the Civil Service website) and the accompanying guide to treatment of staff pensions, Fair Deal for Staff Pensions (on the Treasury website). These documents therefore create an expectation that, following a transfer, transferee employers will put in place broadly comparable pension rights, certified to be such by the Government Actuaries Department (GAD). Bidders for services tendered by public sector bodies will usually expect to have their scheme subject to a GAD certificate.

Transfers from local government are also covered by a Code of Practice on Workforce Matters in Local Authority Service Contracts in the Office of the Deputy Prime Minister Circular 03/2003 (PDF format) (on the Office of the Deputy Prime Minister website). This obliges the transferee either to a make pension provision for the transferred employees or to apply for admitted body status, thus allowing employees to remain members of the Local Government Pension Scheme, by virtue of the enabling provisions of the local Government Pension Scheme (Amendment etc) Regulations 1999.

The Government has now bowed to the will of the trade unions and on 18 March 2005 extended the local government Code of Practice to the wider public sector, including the Civil Service, the NHS and maintained schools. The Code of Practice on Workforce Matters in Public Sector Service Contracts (Microsoft Word format) is available on the Cabinet Office website.

Under the Code, in addition to being offered no less favourable terms and conditions than transferred employees, new joiners must also be offered a reasonable pension through membership of a good-quality employer pension scheme or membership of a stakeholder pension scheme with an employer contribution.

Pensions Act 2004

As noted above, Directive 2001/23/EC allows member states to provide differently from excluding pension rights, but the Government chose not to take up this option in the Transfer of Undertakings (Protection of Employment) Regulations 2006. Instead new regulations made pursuant to the Pensions Act 2004 now apply to make modest inroads into a transferee's right of action concerning pension provision following a transfer.

The Pensions Act 2004 and the Transfer of Employment (Pension Protection) Regulations 2005, in force from 6 April 2005, require a transferee to offer transferring employees the opportunity to participate in an occupational or stakeholder pension scheme following the transfer if they were eligible to participate in an occupational pension scheme prior to the transfer. Where the transferor's occupational pension scheme is a defined benefit scheme, the transferring employees will be protected. If the transferor's occupational pension scheme is a defined contribution scheme, ie a money purchase scheme, the transferring employees will be protected if the transferor pays a contribution to the scheme.

This protection applies not just to transferring employees who are active members of the transferor's occupational pension scheme, but also to transferring employees who are eligible to join the scheme or are in a waiting period to join the scheme. The transferee can choose whether to provide a defined benefit or a defined contribution scheme for the future, regardless of the type of scheme run by the transferor.

In circumstances where the replacement scheme is not a money purchase scheme, ie it is a defined benefit, mixed benefit or hybrid scheme, the level of benefits must meet a statutory minimum standard.

The arrangements must meet the requirements set out in the 'reference scheme test', the minimum benefit standard required for defined benefit schemes that are contracted out of the State pension (Pension Schemes Act 1993, section 12A). If the scheme does not meet the requirements of the reference scheme test it must provide benefits of a value at least equal to 6% of pensionable pay for each year of employment together with the total amount of any contributions made by the member. Where the members are required to contribute to the scheme, the rate at which they contribute must not exceed 6% of their pensionable pay. Alternatively, the scheme must provide for the transferee to match the employee's contributions up to 6% of pensionable pay. Pensionable pay for these purposes is defined under the rules of the scheme.

If a new scheme is a defined contribution scheme (including a stakeholder scheme), the transferee must make a contribution that matches the employee's contributions up to 6% of pensionable pay. Pensionable pay for these purposes is defined as basic salary (and does not include fluctuating emoluments) and must be calculated each time remuneration is paid to the employee.

If there is no employee contribution in respect of a defined contribution scheme there is nothing that a transferee is required to match. In these respects, the protection afforded could prove more apparent than real. In cases of schemes in respect of which it is necessary to meet the 'value equal to 6% of pensionable pay per each year of employment' test the Regulations are silent as to how this is to be determined. Initially this will doubtless fall to the relevant scheme actuaries to consider, but the Pensions Act 2004 provides that it will be a condition of the transferring employees' contracts of employment that the minimum levels of pension provision are met by the transferee. Accordingly, such issues may end up being determined by an employment tribunal (on the basis of its jurisdiction to determine whether a proper written particulars of employment statement has been provided under the Employment Rights Act 1996, section 1) or the courts (which have been known to take different views from those of actuaries).