A recent case relating to pension obligations when a business transfer has implications for the whole spectrum but particular relevance for the industrial engineering sector where groups of employees join the payroll when a business is purchased.

For some time practitioners have been struggling to provide definitive advice on whether an employee’s right to enhancements on early retirement and redundancy under an occupational pension scheme transferred under the Transfer of Undertakings (Protection of Employment) Regulations 2006 (“TUPE”). The recent case of Procter & Gamble v. SCA (“P&G”) provides us with some welcome clarification.

TUPE protects an employee’s rights under their contract of employment on a business sale, so that the receiving employer must replicate those benefits. However, where an employee has a contractual right to “old age, invalidity and survivors’ benefits” under an occupational pension scheme those benefits do not transfer. What had been unclear was whether enhanced benefits on early retirement or redundancy were caught by this exclusion.

The cases of Beckmann (2002) and Martin (2002) considered this point in relation to the NHS schemes. Following a TUPE transfer, the applicants sought to claim the enhanced benefits on early retirement and redundancy that they would have received had they remained in the employment of the NHS. In both cases, the applicants successfully argued that the enhancements on early retirement and redundancy did not relate to “old age, invalidity and survivors’ benefits” and therefore did transfer under TUPE.

In Beckmann and Martin the transferring benefits arose from public sector pensions. What was not clear was whether the courts would apply the same rules to private sector pension schemes. This uncertainty and the potentially considerable costs to a receiving employer has meant that warranty and indemnity protection has generally been sought by the receiving employer within any relevant business sale and purchase agreement.

P&G provides us with some clarity on this matter.

P&G operated a defined benefit scheme which provided more favourable actuarial reductions on early retirement and a bridging pension from early retirement up to state pension age. In 2007, P&G sold their European tissue business to SCA, who did not wish to take responsibility for any liabilities transferring under TUPE, and so the SPA included a price adjustment to take account of these liabilities. When the price adjustment was calculated, it was not clear whether the enhanced pension benefits should be included.

The High Court considered the case of Beckmann and Martin when making its decision on whether the enhanced benefits transferred under TUPE and confirmed:-

  1. A right to enhanced benefits on early retirement and redundancy under a private sector occupational pension scheme does transfer under TUPE.
  2. No distinction should be drawn between public sector and private sector pension schemes.
  3. Where a contractual right to an enhancement exists, the receiving employer will only be responsible for the period between the date when the relevant employees take early retirement and the date when they reach NRD under the scheme rules. The other benefits will remain the responsibility of the previous employer. So the receiving employer would not become responsible for the full early retirement pension.
  4. Where employer consent is required, this will not prevent the enhanced benefits transferring, this means that employees would have a reasonable expectation that their request would be fairly considered following the transfer although they have no right to expect that consent will be granted.

However, a number of practical points remain outstanding, including:-

  • How to calculate the value of any enhancement to any early retirement or redundancy payments; and
  • Where the enhanced benefits are contingent upon consent being given under the scheme rules, who decides whether to give this consent (the former or current employer)?

This will certainly not be the last word on the matter. The judgment may be appealed. Whilst we can now be somewhat more clear on the benefits that transfer under TUPE, until we have greater certainty about the judgment’s practical application, receiving employers will still look for appropriate protections within sale and purchase agreements.

In a nutshell…

  • Enhancements to early retirement and redundancy benefits under an occupation pension scheme transfer under TUPE.
  • Receiving employers will only be responsible for the enhancement from the date of early retirement up until normal retirement date.
  • There are still a number of practical issues that arise from the P&G decision, and appropriate protection should still be sought in sale and purchase agreements.