TUPE and pensions
by Roderick Ramage, solicitor, www.law-office.co.uk
first published (by distribution to professional contacts)
on 28 December 2006
DISCLAIMER
This article is not advice to any person and may
not be taken as a definitive statement of the law in general or in any
particular case. The author does not accept any responsibility for anything
that any person does or does not do as a result of reading it.
Two sets of changes have taken place from 6 April
2006.
1 :
pensions after a TUPE transfer
Sections 257 and 258 of the
Pension Act 2004 altered the effect of Transfer
of Undertakings (Protection of Employment) Regulations 2006,
SI 2006/246 (formerly 1981) (TUPE) with
effect from 6 April 2005, where the transferor is an employer in relation to an
occupational pension scheme. TUPE
itself is not altered, and therefore the exemption in article 10 (formerly 7)
of TUPE remains in force, and rights to old-age, invalidity or
survivors’ benefits under the transferor’s occupational pension schemes do not
pass to the transferee. However the transferee will be required to provide pension
rights to transferring employees if immediately before the transfer:
(a)
the
employee was an active member of the transferor’s occupational pension scheme
and, if the scheme is money purchase, the employer is required to or has
actually made contributions to it;
(b)
the employee was eligible to become
a member; or
(c)
the employee would have been an
active member or eligible if he had been employed for a longer period.
It becomes a condition of the
contract of employment of each such employee that either (i) the employee is or
is eligible to be a member of an occupational pension scheme in respect of
which the transferee is an employer or (ii) the transferee must make “relevant
contributions” to a stakeholder pension scheme of which the employee is a
member. Under option (i) the
transferee’s scheme may be either salary related or money purchase, regardless
of the kind of scheme that the transferring employee belonged to before the
transfer or the kind that the transferee that it offers to its other employees.
If the transferee's
occupational scheme is salary related, what is to be provided must either:
(i)
satisfy the "reference
scheme" test, ie what must be provided to contract out of the State
Secondary Scheme on a final salary basis; or
(ii)
comply with such other requirement
as is prescribed, ie (by reg 2 of the Transfer of Employment (Pension
Protection) Regulations 2005, SI 2005/649)
either (a) the scheme provides benefits
the overall value of which equals or exceeds 6% of pensionable pay or
(b) the transferee pays “relevant contributions” (defined in reg 3) on behalf
of the member.
If the transferee's
occupational scheme is money purchase, the transferee's obligation, as with a
stakeholder scheme, is to make “relevant contributions”. These are prescribed by art 3 of the
Pension Protection Regulations as contributions which match the employee’s
contributions up to a maximum of 6% of the employee’s remuneration. Remuneration for this purpose is basic pay,
disregarding bonus, commission, overtime and similar payments.
Personal pension plans, including grouped personal
pension schemes (GPPPs) are not occupational schemes and are not within the
exemption in article 10 of TUPE. There is an anomaly that members of GPPPs and other personal
pension schemes and stakeholder schemes may be better off after a TUPE transfer
than members of a money purchase occupational scheme. The right to contributions to a GPPP etc passes under TUPE. Therefore, if an employee is entitled to
employer’s contributions over 6%, the transferee will not be limited to the
statutory maximum of 6% applicable where the transferor’s scheme is
occupational.
2 : life
assurance after a TUPE transfers
The survivors’ benefits exemption in article 10 of TUPE
may be restricted in the case of life assurance only schemes by the (probably)
unintended effect of s255 of the Pensions Act 2004. Sub-s (1) requires the
trustees of a UK occupational pension scheme to "secure that the
activities of the scheme are limited to retirement-benefit
activities". By ss(5) retirement
benefits "means (a) benefits paid by reference to reaching, or expecting
to reach, retirement, and (b) benefits that are supplementary to benefits
within paragraph (a) and that are provided on an ancillary basis (i) in the
form of payments on death, disability or termination of employment, or (ii) in
the form of support payments or services in the case of sickness, poverty or
need, or death".
The generally accepted view of s255 of the Pensions
Act 2004 is that stand alone death in service schemes, such as many employers
provide when pensions are provided through a GPPP or stakeholder scheme, ceased
to be occupational schemes from 6 April 2006, because life assurance on its own
is not ancillary to the pension benefits of an occupational scheme. This does not affect their tax
treatment. Schemes which had been
approved before 6 April 2006 ceased to be approved on that day and
automatically became registered by sch 36 of the Finance Act 2004. The fact that they are no longer
occupational does not affect their registration or tax treatment.
However for TUPE purposes there is a substantial
change. As these life assurance only
schemes are no longer occupational, they are no longer exempt from transfer,
even though they provide survivors’ benefits.
Therefore transferees under TUPE, where the transferor has such a
scheme, may now have to provide the
same life assurance or other death in service benefits for the transferring
employees after the transfer as they had before. There is a time trap here.
Cover, whether through the transferor’s scheme or the transferee’s new
scheme, must be in place immediately on completion in order to avoid the risk
of a member dying just after completion (but before insurance has been
arranged), and the grieving widow presenting herself with a babe in arms at the
office the next morning asking how much she is getting and when will she get
it.
(for a
fuller but older version of this article, click
here)
copyright
Roderick Ramage
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