Recent TUPE developments: case studies on the new pension regime

Gareth Brahams, a Partner in the Employment & Incentives Department at Lewis Silkin, looks at a variety of scenarios in relation to the new pension protection regime applicable on the transfer of an undertaking and provides some practical solutions. See last week's article for further information on the new legal framework.

Mergers where both companies have a final salary scheme

Company A has a defined benefits scheme, ie an occupational final salary scheme, as does Company B.

The owners of Company A buy the business of Company B and then merge the two entities together to create a new company, AB & Co. The Transfer of Undertakings (Protection of Employment) Regulations 1981 (TUPE Regulations) apply to the merger.

Although both Company A and Company B had final salary pension schemes, they provided benefits at different rates of accrual. Company A's scheme provided for employees to receive 1/60^th of their final salary for each year of service while Company B operated on the basis of 1/80^th.

What are the options open to the owners of AB & Co?

If AB & Co wants to close the more generous Company A occupational pension scheme and allow the employees who were members of it to join the less generous Company B scheme it can do this.

Alternatively, AB & Co can close both schemes and offer the employees a new final salary scheme or, more likely, membership of a stakeholder pension scheme, with an obligation on the company to match employee contributions up to a maximum of 6%.

However, in either case AB & Co does need to allow for the risk that employees of either old company could claim that early retirement benefits continue to accrue under the provisions of their old scheme as suggested by the European Court of Justice in Beckmann v Dynamco Whicheloe Macfarlane Ltd [2002] IRLR 578 ECJ and Martin and others v South Bank University [2004] IRLR 74 ECJ.

First generation outsourcing where the client has a final salary scheme

Company A decides to outsource its cleaning function. Company B wins the contract. The cleaners transfer from Company A to Company B under the TUPE Regulations. Company A has an occupational pension scheme. What are Company B's obligations with regard to pensions?

Public sector: If Company A is government owned then the public procurement guidelines will probably require Company B to set up its own occupational pension scheme with substantially equivalent benefits to those provided under Company A's old scheme as certified by the Government Actuarial Department.

Private sector: If Company A is a private sector body, unless the outsourcing contract requires otherwise, Company B can admit the inherited workforce to its own occupational pension scheme if it is a final salary scheme, even if the benefits are worse. If Company B's pension scheme is money purchase (sometimes known as defined contribution) it must make the minimum contribution of 6% of salary (although it can require employees to make the same contribution). Alternatively, Company B can admit the employees to a stakeholder scheme provided that it matches contributions to 6% of pensionable salary.

The risks noted above with regard to early retirement benefits apply in this case as well.

Group personal pension scheme

Company A decides to outsource its cleaning function. Company B wins the contract. The cleaners transfer from Company A to Company B under the TUPE Regulations. Company A has an occupational pension scheme. Company B's employees benefit from either an employer contribution to a group personal pension scheme or one to their own personal pension scheme to the extent of 10% of their pensionable earnings. Company B wishes to give the employees inherited from Company A the same pension benefits as it gives to the rest of its staff. Can it do this?

Although this arrangement is, in practice, more generous than the law requires, it does not satisfy the legal requirements. These state that the employer's contribution must be paid into either an occupational pension scheme or a stakeholder pension scheme. Company B's proposed options do not fall into these categories.

Therefore, Company B must either convert its own group personal pension scheme into a stakeholder pension scheme, or obtain the consent of the transferred employees to take either of its existing benefits in lieu of their entitlement under the Transfer of Employment (Pension Protection) Regulations 2005.

Inheriting a scheme with high employee contributions

Company C has been providing a catering service for Company D. Company D now wishes to take that service back in-house.

Company C's pension scheme is a generous 1/60^th final salary scheme. It was designed to mirror Company D's own pension scheme from which the employees benefited before the catering function was initially outsourced. However, the scheme requires employees to contribute 10% of their own salary.

Company D now wishes simply to readmit the employees to its old pension scheme, which, as it provided the model for Company C's scheme, has identical benefits and the same level of contribution. Can it do this?

Company D is not able to do this. Under the Transfer of Employment (Pension Protection) Regulations 2005, the maximum that an employer can require an employee to contribute into an occupational pension scheme following a transfer is 6%. Therefore, Company D must either obtain the consent of each transferred member of staff to the 10% contribution, or require the occupational pension scheme trustees to lower the employee contribution in respect of this group to 6%. Failing that, the employees cannot be readmitted to the occupational pension scheme and Company D will have to go down the stakeholder scheme route or set up a new occupational pension scheme.

Next week's article will consider the Code of Practice on Workforce Matters in Public Sector Service Contracts.

Gareth Brahams is a Partner in the Employment Team at Lewis Silkin (Gareth.Brahams@lewissilkin.com)

Further information on Lewis Silkin can be accessed at www.lewissilkin.com