The Department for Work and Pensions has issued a consultation on the proposed amendments to the Pension Protection Regulations to address the discrepancy between auto-enrolment duties and the minimum level of future benefits owed to transferring employees following a TUPE transfer.
Where there is a transfer of a business to which the Transfer of Undertakings (Protection of Employment) Regulations 2006 (TUPE) applies, transferee employers are required to provide a minimum level of pension benefits for those employees that transfer to them. Currently, the level is determined by the transferring employee, with employers required to match employee contributions up to 6% of pensionable pay in money purchase and stakeholder schemes.
With auto-enrolment legislation requiring all employers to eventually enrol all eligible workers in to a work place pension scheme, and setting minimum levels of employer contributions, the DWP has revisited the Transfer of Employment (Pension Protection) Regulations 2005 (Pension Protection Regulations) to smooth the interaction between TUPE pension rights and auto-enrolment and to clarify the policy intention that it is the transferring employee’s right to choose their rate of contribution.
The proposed amendment to the Pension Protection Regulations will mean that the transferee employer will satisfy the pension protection requirements for transferring employees if contributions are either:
- Not less than those paid by the transferor employer immediately before the transfer; or
- Match the contribution level chosen and paid by the employee, up to a maximum of 6% of the transferring employee’s pay (as is the current requirement).
The purpose of this amendment is an attempt to address the emergence of a two tier pension provision discrepancy existing in the work place where, under auto enrolment legislation, employers pay minimum 1% contributions for existing employees and up to 6% contributions for those employees transferred to them in accordance with the current TUPE Pension Protection Regulations. This may still arise after the amendment where the transferor employer has historically paid generous contributions that the transferee employer has the option to match. In reality this represents a levelling down of pension benefits as employer contributions are unlikely to be above the 6% level that can be set by the member. Therefore, while matching employee contributions up to 6% is still an either/or option, employers are more likely to opt to match transferor employer contributions which are likely to be lower.
The DWP also propose an amendment to make clear the original policy intention behind the 2005 regulations; that the rate of contributions up to 6% is a rate which is chosen by the employee and must be matched by the employer. The DWP are concerned that the current regulations are ambiguous on this point.