Earlier this month the DWP outlined its plans to amend the pension protection legislation that applies on the sale of a business (known as “a TUPE transfer”) to ensure that it achieves the original policy intention and that it fits with the automatic enrolment requirements. The most significant change is that, in future, following a TUPE transfer from an employer that operates a defined contribution (DC) occupational pension scheme, the new employer will not be required to pay matching contributions up to 6% of pensionable pay, but will instead be able to match the contributions paid by the former employer. This will come as a relief to corporate groups and employers engaged in TUPE transfers.

The TUPE pension protection legislation

The Transfer of Employment (Pension Protection) Regulations 2005 (the “Regulations”) were designed to protect the future pension entitlement of employees who were members of, or who had access to, an occupational pension scheme immediately before a TUPE transfer. The original policy intention was that, where immediately before a TUPE transfer the former employer provided an occupational pension scheme for the transferring employees to which it contributed, the new employer would be required (as a minimum) to provide the transferring employees with access to a pension scheme under which it provided matching contributions up to 6% of pensionable pay.

Following a recent review of the Regulations, the DWP concluded that they do not clearly set out the original policy intention as there is nothing that explicitly gives the member the right to choose the rate of contributions. Consequently, the DWP is planning to amend the legislation so that it reflects the original policy intention and confirms an employee’s right to choose the level of their own contributions, which must be matched by the employer up to a maximum of 6% of pensionable pay.

However, this is subject to an additional proposed amendment (see below) which would enable the new employer to cap its contribution at the rate which was paid by the former employer immediately before the transfer.

Auto-enrolment and TUPE

As well as amending the Regulations to ensure that they reflect the original policy intention, the DWP is also planning to make a further change to ensure that they fit with the requirements under the automatic enrolment legislation.

Under the automatic enrolment legislation, an employer that operates a DC occupational pension scheme is only required to pay employer contributions equal to:

  • 1% of qualifying earnings from the employer’s staging date until 30 September 2017;
  • 2% of qualifying earnings from 1 October 2017 and 30 September 2018; and
  • 3% of qualifying earnings thereafter.

In contrast, following a TUPE transfer the new employer could be required to pay contributions of up to 6% of pensionable pay. This anomaly could cause particular problems on internal group reorganisations where a group of companies has decided to provide its staff with the minimum required under the automatic enrolment legislation, because following the reorganisation the new employer would be required to provide the transferring staff with matching contributions up to 6% of pensionable pay. This would result in increased pension costs for the group and a two-tier workforce.

However, as a result of lobbying from ourselves and others within the industry, the DWP has decided to amend the Regulations to address this anomaly. The proposed amendment will mean that, where staff are members of, or eligible to join, a DC occupational pension scheme immediately before a TUPE transfer, the new employer will be given the option of matching the contributions paid by the former employer, instead of paying matching contributions up to 6%. Significantly, this will mean that if the former employer paid the minimum contributions required under the auto-enrolment legislation, the new employer will be able to do the same.

It also means that the obligations on an employer following a TUPE transfer will now be the same regardless of whether the former employer operated a DC occupational pension scheme or a group personal pension plan (where the position has always been that the new employer is only required to match the contributions paid by the former employer).

Comment

The proposed changes to the TUPE pension protection legislation will be welcomed by groups of companies and employers engaged in TUPE transfers. In particular, employers will welcome the fact that they will be able to match the contributions paid by the former employer following a TUPE transfer and that the DWP has addressed the anomaly between the TUPE regulations and the auto-enrolment legislation.

One change that is not contained in the DWP’s consultation paper that we had hoped to see is employers being given the ability to use a group personal pension plan to meet their obligations following a TUPE transfer. Currently, the legislation only allows employers to use an occupational pension scheme or a stakeholder scheme and, in our view, this is unnecessarily restrictive. We will be making this point in our response to the consultation which closes on 5 April 2013.

The changes to the Regulations are due to come into force on 1 October 2013.