Early retirement rights under occupational pension schemes do transfer under TUPE, High Court rules

Out-Law News | 18 May 2012 | 10:06 am | 3 min. read

The buyer of a business will be liable for certain early retirement pension rights under the original owner's occupational pension scheme if the transfer takes place under the Transfer of Undertakings (Protection of Employment) (TUPE) Regulations, the High Court has ruled.

Benefits for "old age, invalidity or survivors" will generally not transfer under TUPE, which protects the rights of employees if the company they work for is taken over by a new owner or the work that they provide is outsourced or brought back in house. However, the court held that only benefits due after the normal retirement date were classed as 'old age benefits', meaning that responsibility for any benefits due between an early retirement date and the normal retirement date of a pension scheme member transferred to the new employer.

In his judgment, Mr Justice Hildyard followed the reasoning of the European Court of Justice (ECJ) in two earlier public sector cases, known as 'Beckmann' and 'Martin'. As the early retirement portion of the pension was not a benefit for "old age", it did not fall within the exemption and therefore responsibility to fulfil it transferred to Swedish company Svenska Cellulosa Aktiebolaget (SCA) when it purchased the European tissue business belonging to Proctor and Gamble (P&G) in 2007.

"In Martin, the first question that the ECJ had to consider... was 'essentially whether rights contingent upon dismissal or the grant of early retirement by agreement with the employer fall within the concept of 'rights and obligations' [that transfer under TUPE]'. Its answer was that they do," he said. "The ECJ drew a distinction between, on the one hand, a right and obligation and, on the other hand, their implementation... the right and obligation fall within [the transfer] notwithstanding that their implementation is discretionary."

Although certain assumptions were required to value the rights that were subject to employer consent, those rights did have a value that enabled them to pass under TUPE, he said.

The employees transferring to SCA were members of P&G's final salary pension scheme, and the sale and purchase agreement between the two companies provided that SCA would pay P&G a sum to reflect its liability for any pension rights transferring under TUPE, ensuring that the Swedish company would not have to take on any pension obligations for its UK employees who remained within the scheme. SCA argued that this payment did not have to reflect the value of any benefits due after retirement, including those that would be payable to those employees who chose to retire early.

The P&G scheme was a final salary pension which allowed active members to retire early, from age 55, with employer consent. These employees became deferred members of the P&G scheme when their employment transferred to SCA, meaning that they remained entitled to benefits under the scheme but were no longer accruing benefits. They also lost the right to a 'bridging pension' – the portion which made up for the amount they were not eligible to receive until they were entitled to claim the state pension - and to potentially more generous actuarial reduction factors based on length of service, and the benefits payable under the scheme on retirement would be based on salary at the date of the transfer regardless of any later salary increases.

Pensions law expert Simon Tyler of Pinsent Masons, the law firm behind Out-Law.com, said that the decision was an important one because it was the first time the court had had to consider private sector pension rights following the Beckmann and Martin cases. The extent of those rights, and whether they extended to private sector occupational schemes, had otherwise remained undecided, he said.

"Private sector employers will be disappointed that the court did not take the opportunity to restrict the application of those cases to public sector schemes," he said. "This decision has significantly increased the costs for private sector employers buying businesses that offer a final salary scheme."

Occupational pension schemes do not generally distinguish between the early retirement portion of a pension and the pension received after the normal retirement date, as was the case in the schemes considered in the Beckmann and Martin cases. Instead, private sector pensions paid early are reduced depending on how early payment began.

The case also left a number of points undecided, Tyler said, which was "frustrating".

"The case says nothing about what rights a buyer must offer in respect of employees' service after the transfer and it does not explain what mechanism a buyer could use to provide enhancements in excess of normal defined benefits," he explained. "Unfortunately, employers wishing to know how to deal with future TUPE cases, or to review past cases, will still be left largely in the dark."

The judgment may be appealed in any event, he added.