In this month’s Pensions Extra we consider the extent to which pensions liabilities transfer under the Transfer of Undertakings (Protection of Employment) Regulations 2006 (TUPE) on the sale of a business following the recent case of Procter & Gamble v SCA.
Background – TUPE and pensions liabilities
Generally, when an employee’s employment transfers to a new employer under TUPE, the rights and obligations arising from the employment relationship (e.g. pay, holidays etc.) also transfer to the new employer. TUPE excludes from the scope of such a transfer those rights and obligations relating to an ‘occupational pension scheme’. This exclusion, known colloquially as the ‘pensions exception’, is qualified to provide that any provisions of an occupational pension scheme which do not relate to ‘old age, invalidity or survivors’ are not treated as being part of the scheme, and therefore are not included within the pensions exception and may transfer.
In this context, the term ‘occupational pension scheme’ includes most trust-based DB and DC schemes and so for members of such schemes, old age, invalidity or survivors’ benefits will not transfer. Any new employer is however obliged under the Pensions Act 2004 to provide a minimum level of pension benefits for transferring employees who were members (or prospective members) of a trust-based DB or DC scheme where certain conditions are met. Contract-based private pension schemes such as GPPs are not included and therefore if an employee has a contractual right to receive employer contributions to a personal pension scheme, that right will TUPE transfer to the new employer.
The effect of the pensions exception was limited by the decisions of the European Court of Justice (ECJ) - now the Court of Justice for the European Union (CJEU) - in the cases of Beckmann and Martin. In Beckmann and Martin the ECJ held that in certain circumstances early retirement benefits may not be ‘benefits for old age, invalidity or survivors’ and therefore liability to provide such benefits may transfer under TUPE.
There has been some argument as to whether the decisions of Beckmann and Martin apply to private sector occupational pension schemes - both of these cases concerned an entitlement to benefits under a public sector pension scheme in which benefits are structured quite differently to a private sector scheme. Until recently, no further cases had considered the scope of the pensions exception and the position remained unclear. On business transfers, this uncertainty tends to be addressed by a seller agreeing to indemnify a buyer for any liability to provide pension benefits arising as a result of the TUPE transfer of any Beckmann and Martin-type benefits.
Procter & Gamble v SCA – the facts
The case related to a number of Procter & Gamble (P&G) employees who TUPE transferred to SCA as a result of the sale of P&G’s tissue towel business to SCA. The transferring employees were active members of the DB section of the P&G pension scheme.
The P&G pension scheme provided certain early retirement benefits for members including a right to request retirement at any time after age 55 and commence payment of an actuarially reduced pension. In contrast to deferred members, on exercising this right, active members were entitled to a bridging pension paid until state pension age. In addition, those with 15 years or more service enjoyed more favourable actuarial reduction factors. The transferring employees lost their entitlement to these enhancements on their transfer to SCA as they became deferred members of the P&G pension scheme.
In recognition of the uncertainty in respect of the scope of the pensions exception arising from Beckmann and Martin and in lieu of a more common ‘Beckmann indemnity’, the sale agreement between P&G and SCA provided that SCA would be liable for any accrued pension liabilities that passed to it under TUPE, subject to an appropriate reduction to the purchase price paid.
The difference between the parties arose when the adjustment to the purchase price came to be calculated following conclusion of the sale agreement. In essence, the dispute centred on whether the enhanced early retirement benefits TUPE transferred and, if there was a transfer, whether the liability to provide those was a liability for which a price adjustment should be made under the sale agreement. There was also disagreement as to the extent of the obligations which may transfer – did liability for all early retirement benefits or just the enhancements transfer?
Procter & Gamble v SCA - The decision
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 for early retirement benefits in good faith transfers to the buyer under TUPE. The value of this right was held to be capable of calculation, and therefore an adjustment to the purchase price was directed to be made in respect of the transferring employees’ early retirement benefits.
Considering the scope of the transferring liability, the High Court held that this is limited to those benefits not met by a transferring employee becoming a deferred member of the seller’s pension scheme. On that basis, SCA was liable only for the enhancements that were no longer available following the TUPE transfer and not for the full early retirement pension.
Finally, it was clarified that early retirement benefits should only be treated as such until an employee’s normal retirement date, from which point they become ‘old age benefits’. Consequently, liability for any pension payable post-normal retirement date remained with P&G.
The decision in Procter & Gamble v SCA is the first time the UK courts have fully considered the scope of the TUPE pensions exception in relation to early retirement rights following Beckmann and Martin. It is useful in so far as it confirms the extent to which rights to early retirement pensions transfer under TUPE. In particular, it puts paid to any argument that Beckmann and Martin should not apply to private sector pension schemes and confirms that conditional early retirement rights (i.e. those subject to consent) are capable of transferring.
Unfortunately, the case also leaves a number of questions unanswered – for example, are rights relating to service post-transfer included? How will the buyer exercise its role in the seller’s scheme to give consent to early retirement? Would a right to an early retirement pension that is subject to the consent of the trustees as opposed to the employer also transfer? And how would the buyer pay the enhancement in the seller’s scheme as any such payment is likely to be an unauthorised payment under the Finance Act 2004?
We understand that the judgement is likely to be appealed and so it may be that there are further developments in due course. Until there is greater clarity, we expect parties to business transfers to continue to address the issue of the scope of the TUPE pensions exception by means of a ‘Beckmann indemnity’.