Legislation is due to come into force on 6 April 2014 changing the pension benefits that must be offered to employees transferring to a new employer where the TUPE regulations1 apply to the transfer.
From 6 April 2014, where an employee has been provided with an occupational pension scheme by his previous employer (the transferor) and transfers to a new employer (the transferee) as a result of a TUPE transfer, the new employer will be required to make the following pension contributions, if it wishes to offer the transferring employee membership of a money purchase or stakeholder pension arrangement.
- Employer contributions that match the employee’s contributions, up to a maximum of 6% of the employee’s basic pay. Or
- The same employer contributions as the transferor was obliged to make to the employee’s money purchase pension arrangement prior to the transfer (this option is a relaxation to the current requirements).
Where the transferor did not provide a money purchase pension arrangement prior to the transfer, the relaxation in option 2 does not apply (i.e., the transferee should still provide matching contributions, up to a maximum of 6% of the employee’s basic pay).
Different rules apply if the transferee wishes to provide a transferring employee with a pension plan that is not a money purchase arrangement.
Why the Change?
Before 6 April 2014 option 2 is not available, so if the transferee is to provide a transferring employee with a money purchase arrangement it is required to match the employee’s contributions, up to a maximum of 6% of basic pay. The transferee may therefore end up paying higher pension contributions than the transferor did as a consequence of the TUPE transfer. In addition, the transferee may have to pay higher pension contributions for the transferring employees than it does for its existing employees – creating a “two tier” workforce. These issues are exacerbated where the TUPE obligations clash with the employers’ automatic enrolment duties under the Pensions Act 2008, which set different levels of minimum contributions that must be paid to money purchase arrangements used to meet automatic enrolment duties.
From 6 April 2014, the changes represent a helpful relaxation for employers, who may as a result choose to match the contributions paid by a transferor, particularly if doing so would involve a lower cost than matching employee contributions up to 6%.
However, the revised regulations do not prevent the creation of a “two tier” workforce if the level of pension contributions paid in respect of transferring employees does not correspond with the contributions paid for the transferee’s existing workforce. Neither does the legislation yet provide a complete and clear answer on how TUPE and automatic enrolment are intended to work together.
Employers contemplating a TUPE transfer should note the pending change in legislation and seek legal advice on the impact of the new pension protection rules.