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Pension rights and TUPE transfers

13 August 12

The recent Procter & Gamble case in England has provided some clarity on the extent to which rights under occupational pension schemes transfer to a purchaser of a business

by Katie Kerr

In the recent case of The Procter & Gamble Company v Svenska Cellulosa Aktiebolaget SCA [2012] EWHC 1257 (Ch), the High Court in England provided some clarity for employers on the extent to which rights under occupational pension schemes transfer to a purchaser on the sale of a business.

Broadly, under the Transfer of Undertakings (Protection of Employment) Regulations 2006 (“TUPE”), when employees transfer to a new employer on the sale of a business, the rights and obligations under the contracts of employment of the transferring employees automatically pass over to the new employer. TUPE reflects the provisions of Directive 2001/23/EC (the “Acquired Rights Directive”).

However, under reg 10(2) of TUPE, any provisions of an occupational pension scheme which relate to benefits for “old age, invalidity or survivors” do not automatically transfer.

The meaning of “old age, invalidity or survivors” benefits was considered by the ECJ in the cases of Beckmann v Dynamco Whicheloe Macfarlane Ltd [2002] IRLR 578 and Martin v Southbank University [2004] IRLR 74. It was decided that enhanced benefits payable on redundancy and early retirement were not “old age” benefits, therefore obligations in relation to these benefits did transfer to the purchaser.

Some areas of uncertainty have existed since these decisions. As a result, it was common practice for parties to a transaction to seek to agree a “Beckmann indemnity”, under which the purchaser would be indemnified for any claims arising as a result of the operation of TUPE.

Procter & Gamble transferred its tissue towel business to SCA in March 2007. The share purchase agreement provided that SCA would be responsible for any accrued pension liabilities that passed to it under TUPE. However, the purchase price would be reduced by the necessary amount to reflect these liabilities. The affected members were active members of the defined benefit section of the Procter & Gamble pension fund before the sale. Unusually, SCA refused Procter & Gamble’s offer of a Beckmann indemnity.

The governing rules of the pension fund provided that members could retire from age 55 with employer consent, and receive a pension reduced for early payment. These pensions would be discounted by differing amounts, depending whether or not the member had accrued 15 or more years’ continuous service.

Three issues were considered by the court:

First, which rights transferred under TUPE?

Secondly, did liability for full early retirement benefits transfer under TUPE, or just for the enhanced elements?

Thirdly, what was the scope of an “old age benefit” referred to in reg 10(2) of TUPE?

The court concluded that:

(1) If the rules of a pension scheme permit early retirement subject to the consent of the employer, an employee’s right to be considered for early retirement benefits transfers to the purchaser under TUPE.

(2) Liability to provide full early retirement benefits does not transfer, just those which relate to what have been described as “enhancements”. There could be no double recovery by pensioners from both Procter & Gamble and SCA (referred to in the judgment as the “smiling pensioner” point).

(3) Liability for an “old age benefit” (which does not pass to the purchaser under TUPE) includes pension instalments paid to a member after normal retirement age, where the sole purpose of the pension was to support the recipient after retirement having attained a specified age and without any other trigger. The fact that the pension came into payment before that age was irrelevant.

Although the decision in Procter & Gamble helps to clarify some of the unresolved questions following Beckmann and Martin, it also raises further questions of its own.

For example, how can a purchaser give consent to early retirement in the seller’s scheme? Do any constraints apply? If the benefit is covered by an indemnity or a price adjustment, will a purchaser ever say no? Also, it is really possible in practice to value the right to be considered for early retirement? Can a purchaser pay an enhancement in a seller’s scheme without falling foul of the Finance Act 2004? Doubts also remain about the applicability of Beckmann and Martin to transfers in the private sector.

So while the judgment answers some questions, there are still some unresolved practical issues and this may not be the end of the matter, as the case may well be appealed by SCA.

Katie Kerr, associate, Employment & Pensions, DWF Biggart Baillie

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