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Early Retirement, The “Pensions Exception” – TUPE Implications For Private Sector Schemes

A recent decision has found that early retirement pension rights of employees transferring under TUPE apply to both public and private sector schemes. It was also decided that once an individual has reached their normal retirement age, the buyer is no longer liable for rights that transfer which go beyond this age.


When an employee’s employment transfers to a new employer under TUPE, rights and duties under the Transfer of Undertakings (Protection of Employment) Regulations 2006 will also transfer. However, TUPE excludes from the transfer so much of a contract of employment as relates to “old age, invalidity or survivors” benefits under an occupational pension scheme, known as the “pensions exception”. “Occupational” includes most trust based schemes established by an employer, including defined benefit and defined contribution.

Hitherto, it was not necessary to provide any replacement benefits for such excluded rights. Under the Pensions Act 2004, a requirement was introduced to provide a minimum level of benefits for affected members where certain conditions are met. Contract-based private schemes (such as those offered by insurance companies) are not occupational schemes and therefore any promises of employer contributions under the transferor’s contract will pass to the new Transferee.

The effect of the pensions exception was limited by various decisions of the European Court of Justice (now the CJEU) in the cases of Beckmann and Martin. In those cases, it was held that it was possible that benefits such as early retirements payable in situations where they were held not to be related to old age, invalidity or survivors’ benefits (e.g. arising on redundancy) could pass to the transferee employer. You will see the difficulty in this, which is that the transferee employer arguably has to fund such an early retirement pension, but the fund for that member remains with the transferor employer.

There has been some dispute as to whether this principle would apply to private sector schemes as both these cases concerned transfers from the public sector where early retirement pensions on redundancy are common. It has been usual in transactions for this to be dealt with by way of an indemnity from the transferor employer in the sale and purchase agreement. The issue is compounded where such benefits are only payable with the consent of the employer. Arguably an transferor employer would wish to favour itself and decline to give such consent. Also, what is the position where the old scheme trustees have to give their consent? Does this still continue to subsist? These issues have been aired recently in the recent case of Proctor and Gamble v SCA

The case concerned a number of PG employees who were active members of the P&G Pension scheme who transferred to SCA under TUPE. The P&G scheme contained early retirement terms allowing a member to request early retirement from age 55 of an actuarially reduced pension payable as a bridging pension under Normal Retirement Age. Other members with fifteen years’ service had favourable early retirement actuarial assumptions applied. All the transferring actives lost these benefits in the P&G scheme when they stopped being active members.

The sale and purchase agreement provided that SCA would be liable for any accrued pension liabilities which passed to it (subject to a reduction in the purchase price). A number of disputes arose as to calculation of and liability for such benefits, and an application was made to Court.

The High Court held that where the rules of a pension scheme provide for the availability of early retirement subject to the consent of the employer, an employee’s right to be considered in good faith passes to the transferee employer under TUPE. This had a value, and therefore an adjustment to the purchase price was ordered. Crucially the Court held that this is limited to those benefits not met by a transferring employee becoming a deferred pensioner in the transferor scheme. SCE were liable only for the enhancements that were no longer available following the TUPE transfer and not for the full early retirement pension.

The Court also clarified that “early retirement pensions” were only treated as such under Normal Retirement Age was reached, when they become “old age” benefits and so the transferee employer was not required to continue to provide such pensions after the member’s NRA under the former scheme was reached.

There remain a number of unanswered questions. Does service post-transfer in respect of these rights continue? It would seem that it may. Can the transferee employer prefer itself by withholding consent, or would this be a breach of mutual trust and confidence? If such early retirement pension was subject to the old scheme trustees’ consent, does this transfer (our preferred view is that it falls away as it cannot be exercised by the transferee employer as part of the contract under TUPE). If the transferee employer makes a payment to an affected member, how is this treated for tax purposes? If not undertaken through a registered pension scheme, it may be unauthorised and subject to a special tax regime.

Also, don’t forget that auto enrolment is around the corner, if there is a TUPE transfer in respect of employees already subject to the auto enrolment regime, you may have to provide pension contributions in advance of your own Staging Date.

What action do you need to take?

In any TUPE transaction, it is vital that you obtain good due diligence on the transferor employer’s pension arrangements, including where an employee has transferred in previously (there may be rights which transferred under a previous transfer). Check the consent position – who consents to such enhanced retirements? Obtain a full indemnity in respect of such rights. If in doubt, keep it simple in the sale and purchase agreement, complicated structures involving actuarial calculations and set offs can be fraught with difficulty in implementation.