Urenco UK Limited v Urenco UK Pension Trustee Company Limited2

This High Court decision confirms the long standing principle that employees transferring out of public sector employment into pension schemes offering ‘broadly comparable benefits’ may, depending on the circumstances, enjoy long lasting pension protection, both at the time of the original first generation transfer and on subsequent transfers.

Facts

Members of the Urenco Scheme were historically members of the Combined Pension Scheme (CPS), a pension scheme provided by the United Kingdom Atomic Energy Authority. By a sale and purchase agreement (SPA) made between the Nuclear Decommissioning Authority (NDA), Sellafield Ltd and Urenco (Capenhurst) Limited (Urenco), certain Sellafield’s employees had their employment transferred to Urenco by operation of TUPE.

As a reminder, a TUPE transfer occurs when the business and assets of one entity are transferred to another entity; with the new employer stepping into the shoes of the old employer.

As nuclear industry employees, Sellafield transferred employees were entitled to specific, enhanced pension protections (contained in the Energy Act 2004). As part of the SPA, NDA needed to be satisfied that immediately following the TUPE transfer, the pension benefits available under the Urenco Scheme were no less favourable than the pension benefits (taken as a whole) offered by the CPS. Urenco Scheme benefits for transferred employees had to be enhanced to enable the scheme to be considered ‘broadly comparable’ and for a certificate of broad comparability to be issued by the Government Actuary’s Department.

A number of years later, faced with a worsening scheme funding position, Urenco proposed certain changes to the benefit structure which would affect all scheme members including the transferred employees. The proposal was to increase member contributions from 7.5% to 9.5% and reduce the maximum rate of increase applying to pensions in payment, from the lower of RPI and 5% to the lower of RPI and 2.5%. The proposed changes would result in transferred employees enjoying less favourable benefits when compared to those that they had enjoyed whilst in the public sector.

The Court had to decide whether the scheme’s power of amendment could be used to implement the proposed changes bearing in mind the protections that transferred employees enjoyed under the Energy Act 2004?

To answer this question, the Court considered the statutory position under Schedule 8 of the Energy Act 2004. Although specific to the facts, the requirement under the Act that the incoming scheme was “no less favourable” can be applied generally to transfers from the public to private sectors.

‘No less favourable’ test

The Court acknowledged that the “no less favourable” test was difficult to apply. For a first generation transfer, the comparison is between the pension benefits available to relevant employees under their new employer’s pension scheme post transfer, compared to the pension benefits enjoyed under the old public sector scheme immediately prior to the transfer.

Where there is a second generation transfer, the comparison is between the pension benefits available under the second generation receiving scheme when compared to those in the original public sector scheme at the time of the first generation transfer.

A similar approach is to be adopted where the governing documentation of the receiving scheme - which received employees from the public sector - is to be amended (as was the case here). When making the comparison to the benefit structure of the relevant public sector scheme, any actual changes that have taken place in that public sector scheme since the first generation transfer are to be ignored.

A snapshot approach should be applied

The Court held that the proposed changes to the scheme could not be made. This was because the receiving scheme must provide benefits in respect of all future service which are no less favourable than the benefits provided by the nuclear scheme on the transfer date, ignoring its power of amendment. The Scheme could not be said to have satisfied the ‘no less favourable’ test if benefits for future service were subject to reduction as a result of the operation of the ‘broadly comparable’ scheme’s power of amendment. In this respect, increases in contributions to the scheme were, in principle, to be treated in the same way as reductions in future service benefits are treated ie both were objectionable.

The impact of the Undertakings

The Court was also asked to decide whether the scheme’s power of amendment in relation to the future service benefits of the transferred employees was constrained by the terms of the SPA and the Undertakings given by Urenco.

The Court concluded that the Undertakings given by Urenco were to be read as permanent in their effect. The Court said there was nothing in their wording or in the context in which they were given which suggested that they were time limited or subject to unilateral variation. It did not make any difference that the undertakings could have been given effect to by amendment to the scheme itself, but that this had not been done. In the Court’s view, the power of amendment was constrained by the irrevocable nature of the Undertakings.

Comment

This case highlights the generous protections enjoyed by members of various public sector pension schemes; and importantly that such protections may continue to be enjoyed for many years. This should be factored in to any bid being made by a private sector employer that involves the transfer of public sector employees. Such an employer should consider asking for suitable indemnities in respect of unexpected pension liabilities.

Trustees and employers of schemes receiving members under a TUPE transfer out of public sector schemes need to ensure the condition of broad compatibility continues to be met before making detrimental changes to the scheme’s benefit structure, which impact members who transferred out of the public sector.

Employers and outsourcing contractors should watch this space as Government announcements over the summer indicate that change is in the air. The intention is for private sector employers to be given the option of participating in existing public sector schemes instead of having to establish and operate their own “broadly comparable” schemes. We will keep you abreast of developments.