Doubts over what pension liabilities transfer to a buyer/provider are a complicating factor in business sales and outsourcings. A recent High Court case (Procter & Gamble v. SCA Hygiene Products) has provided some clarity on the issue.

Background

In 2007, Procter & Gamble (P&G) sold its European paper tissue business to SCA. Some transferring employees were members of P&G's UK defined benefit occupational pension scheme. The business sale agreement provided for the purchase price to be reduced by the value of pension liabilities transferred to SCA. The High Court was asked to decide which (if any) liabilities had transferred.

TUPE and the Beckmann and Martin Cases

When a business is transferred, TUPE automatically transfers employees' contracts of employment from the seller/outsourcer to the buyer/provider. However, this automatic transfer does not apply to old age, invalidity and survivor benefits under an occupational pension scheme.

The Beckmann and Martin cases (decided by the European Court of Justice – now the Court of Justice of the European Union) decided that benefits payable on redundancy or agreed early retirement before scheme normal retirement age (NRA) are not old age benefits and transfer to an employee's new employer. However, the cases dealt with rights payable to members of the NHS pension scheme under a collective agreement, leaving it unclear as to what rights and obligations transfer in relation to members of company occupational pension schemes.

The Court's Decision

In line with previous cases, the Court held that in applying UK legislation, such as TUPE, which implements EU law, a flexible and pragmatic approach is needed. TUPE should be interpreted and applied to ensure transferring employees are entitled to benefits from their new employer which are equivalent to those provided by their former employer.

The Court held that the liability to benefits on and after a scheme's NRA does not transfer as this liability is satisfied by the deferred pension payable from NRA under the transferring employer's scheme. The transferring employer will remain liable to fund this benefit. However, rights to benefits before and up to NRA which are not satisfied by the deferred pension will transfer under TUPE. This is the case even if the right is only that the person's employer will consider agreeing to provide enhanced early retirement benefits. The fact that a benefit is a discretionary one or may be terminated or varied by an employer will not prevent the right transferring. Any discretion will transfer to the employee's new employer.

Comment

The case is a helpful first step towards resolving some doubts left by the Beckmann and Martin cases. It takes a common sense approach that members should, so far as possible, be no better or worse off because of the transfer of their employment. They should not be entitled to a windfall benefit of receiving duplicate benefits from their current and former employers.

The Court, however, left the important details of the precise nature and calculation of the liabilities to be assumed by SCA to be settled at a later date and, for the moment, many questions remain unanswered.

In this case, by becoming deferred members on the transfer of their employment, employees lost the opportunity to be considered for and take early retirement and receive a bridging pension payable between their pension start date and state pension age. They also lost the ability to complete 15 years' service qualifying them for preferential early retirement factors. What is unclear is, if paying a bridging pension has no effect on the actuarial value of a member's benefits, what (if any) amount must a member's new employer pay? It is also unclear whether service with the new employer should count towards the 15 years necessary to qualify for preferential early retirement factors and what liability a member's new employer would have to meet if preferential factors were applied – the amount of the full pension payable up to NRA or just the difference between the normal and preferential factors? Further cases are likely to be needed to clarify these issues.