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Pensions and TUPE

When TUPE applies

TUPE is the UK legislation that protects employees' terms and conditions of employment when they're transferred to a new employer.

TUPE applies whenever a relevant transfer of employees is made. A relevant transfer takes place if employees are transferred to a new employer because:

• a business or undertaking is moved from one company to another and continues as a going concern (known as a business transfer), or
• a contract is moved from one contractor to another (known as a service provision change)

As well as the obvious employee transfers, TUPE also applies where companies are merged to form a new company or where work is outsourced (or brought in-house).

How TUPE protects pensions

When there's a relevant transfer of employees, TUPE:

• fully protects employees' existing contractual rights under private pension arrangements, such as personal or stakeholder pension schemes and
• provides some protection to employees with existing occupational pension rights (see below)

Bear in mind that TUPE only sets minimum legal requirements. The agreed terms for a particular company sale, or employee transfer, might impose greater obligations on the buyer than the minimum required by TUPE.

Protection of occupational pension rights
On a relevant transfer of employees, TUPE protects occupational pension rights for employees of the old employer who:

• were active members of the occupational pension scheme
• were eligible to be members of the occupational pension scheme, or
• would have been eligible to join the scheme after completing a waiting period

The new employer must offer any protected employees membership of either:

• an occupational money purchase pension scheme or stakeholder pension scheme* which offers employer payments that at least match member payments up to 6% of basic pay - but if the transferring scheme was an occupational money purchase pension scheme, the new employer is only obliged to match the level of contributions made by the old employer if this is less.
  
  * It's important to note that offering membership of a personal pension scheme that isn't a stakeholder pension scheme doesn't meet the TUPE requirements.

or

• a defined benefit occupational pension scheme which:
  
  
  • meets the reference scheme test (which, broadly speaking, means providing a pension of at least 1/80 of qualifying earnings for each year of membership), or
  • provides employer-funded benefits worth at least 6% of pensionable pay in addition to any benefits funded by member payments (and where members cannot be required to pay more than 6% of pensionable pay), or
  • offers employer payments that at least match member payments up to 6% of basic pay

Any of these options can be used by the new employer, regardless of the nature of the old employer's occupational pension scheme. For example, employees who were members of a defined benefit occupational pension scheme with the old employer can be offered payments to a stakeholder pension scheme by the new employer.

TUPE requirements apply as soon as the protected employees are transferred to the new employer, so the minimum benefits must be offered immediately. Where protected employees were on a waiting period with the old employer, they must be offered the minimum benefits when they've completed that waiting period.

Public sector pensions

Protection of pension rights when public sector employees are transferred to another employer has been a particular political hot potato over the years.

Public sector employees' pension rights are now protected by TUPE if they're transferred to private sector employers. However, transfers within the public sector (for example, when government departments are restructured) aren't necessarily covered by TUPE.

Public sector employees transferred to the private sector are also covered by the Statement of Practice "Staff Transfers in the Public Sector" published by the Cabinet Office.

The compulsory competitive tendering rules led to a significant increase in the outsourcing of public sector work to the private sector in the late 1990s. In many cases, cuts in pension rights for transferred employees played a key part in the new employer being able to price their tender so competitively - much to the displeasure of the employees and their unions.

The Statement of Practice introduced pension safeguards for transferred employees for all public sector contracts advertised from March 2003, by making it part of the tendering process that the new employer had to offer appropriate good quality occupational pension arrangements.

To meet this test, the prospective new employer must get actuarial certification from the Government Actuary's Department (GAD) that the new pension arrangements on offer are "broadly comparable" to those provided in the public sector. GAD has published detailed guidance on how the broad comparability of new pension arrangements will be measured but, in simple terms, the aim is to make sure that no employee will be materially worse off as a result of the transfer.

Alternatively, the new employer may be able to apply for admitted body status to participate in the public sector pension scheme - allowing the transferred employees' pension arrangements to continue as they were.

Pensions and maternity, paternity, adoption & parental leave

Pension scheme membership

The way that maternity, paternity, adoption or parental leave affects an employee's membership of their employer's pension scheme mainly depends on whether the leave is paid or unpaid.

Employees remain full members of their employer's pension scheme during:

• ordinary maternity leave (whether the leave is paid or not)
• paid additional maternity leave
• ordinary paternity leave
• paid additional paternity leave
• ordinary adoption leave
• paid additional adoption leave
• paid parental leave

The level of provision required can, however, depend on the type of pension scheme involved and the level of contribution paid by the employee during their leave.

If the leave is unpaid (other than unpaid ordinary maternity or adoption leave), there's no statutory requirement for the employer to maintain the employee's pension provision. Of course employers can, and often do, continue to provide pension or death benefits even if there's no legal obligation for them to do so.

Pension contributions

Where an employee’s membership of their employer’s pension scheme continues during their maternity, paternity or adoption leave, employer pension provision must normally continue based on notional full pay as if they were still working.

• Where the employer was paying a fixed contribution to the scheme, this should continue at the same level
• If the employer's contribution was a percentage of the employee's salary, this should continue based on the notional full pensionable pay the employee would be getting if they were still working (taking account of any salary increases during the period of leave)
• For defined benefits, service up until the end of any pensionable leave and after total leave must be treated as continuous when calculating the employee's pension

Employee pension contributions are normally based on the actual pay they receive, including any statutory maternity pay, statutory paternity pay or statutory adoption pay. Of course, employers and/or trustees can agree to employee contributions stopping completely.

The way any shortfall in employee contributions is treated depends on the type of pension scheme involved:

• Occupational defined benefit schemes: Not only must the employer continue to pay their contributions, they must also make up any shortfall caused by a reduction in the employee's contributions. The shortfall can be made up immediately or in the long term, as the scheme's funding position requires.
• Occupational money purchase schemes: The issue of whether employers with money purchase occupational pension schemes need to make up any shortfall in employee contributions isn't so clear. The DWP have said the employer only needs to pay its own contributions and not the employee shortfall. 
• Personal pension and stakeholder schemes: If an employee is a member of a contract based pension scheme, such as a group personal pension scheme where the employer will pay 3% provided the employee pays 3%, the situation isn't clear. It could be argued that, because this is a contractual arrangement, if the employee reduces their contribution they'll breach the contract - thereby allowing the employer to reduce or stop their contributions. However, until there's further legislation or a court judgement, if an employer wants to do this they should get legal advice on the matter.

During paid parental leave, pension provision by both the employer and employee must normally continue based on actual pay.

These rules also apply where employees have been auto-enrolled into pension schemes. But note that where employees are on maternity leave at the employer's staging date, it's their actual earnings that are assessed to determine whether they qualify for auto-enrolment.

Death benefit cover

Where an employee’s membership of their employer’s pension scheme continues during their maternity, paternity or adoption leave, cover for death benefits under the scheme must continue.

If the level of cover depends on the employee's salary (for example, where the lump sum death benefit is a multiple of pensionable salary) this should continue based on the notional full pay the employee would be getting if they were still working (taking account of any salary increases during the period of leave).

Pensions and age discrimination

The anti-discrimination rules made it illegal, from 1 December 2006, for employers, pension scheme trustees or managers, to discriminate against pension scheme members (or prospective members) based on their age. However, it's recognised that pension schemes by their very nature rely on some age related practices in order to run properly. To this end it:

• allows pension related age discrimination where it can be objectively justified and
• makes specific exemptions for some age related pension practices.

All aspects of occupational pension schemes are covered by the age discrimination legislation but, for personal pension schemes, only employer contributions (including access to these contributions) are covered.

The law covers both direct and indirect discrimination on grounds of age and anyone can make a claim of age discrimination - not just older people.

• Direct discrimination - where someone is treated less favourably specifically because of their age
• Indirect discrimination - where something that isn't specifically based on age results, in practice, in someone actually being disadvantaged because of their age

Anyone complaining of age discrimination needs to show that they're being treated worse than someone else in a similar position (known as a comparator) because of their age. If no real comparator exists, a hypothetical comparator can be used to show discrimination.

Claims can be taken to an employment tribunal or, where occupational pension schemes are concerned, to the Pensions Ombudsman.

Employers and trustees will have to work closely with their legal advisers, possibly in conjunction with actuarial advisers, to:

• develop, adopt and communicate a clear pensions age discrimination policy and
• check existing pension scheme documentation and practices for age related criteria, making appropriate changes where necessary to comply with the law

Those being discriminated against from 1 December 2006 may be able to claim the higher pension benefits for the period during which they suffered discrimination.

A detailed guide to the rules can be found on the DWP website.

Age discrimination and retirement age

Originally, the age discrimination rules allowed a default retirement age of 65, at which point employers could force employees to retire. However, on 1 October 2011 this was abolished, allowing employees of all ages to continue working as long as they're able to meet the demands of their job. And of course, they would still be entitled to the appropriate benefits, such as a pension contribution, unless the employer can show an objective justification against this, or there's a specific exemption.

In April 2012, a Supreme Court ruling in the case of Seldon v Clarkson Wright and Jakes, gave an illustration of what would be considered objective justification for employers to force their workers to retire. The Court decided that succession planning and fairness between generations were legitimate aims, though it remains to be seen how far reaching this judgement will be in practice as employers may choose not to change their retirement policy, as they would ultimately have to prove objective justification to the Courts.

It's still possible to retire an employee at a set age via an employer justified retirement age. This is where a particular job will need a significant level of physical fitness and/or exceptional mental acuity (such as the emergency services or air traffic controllers). This type of objective justification will need to be considered carefully by the employer, as it must be for a legitimate aim, which will need to be proved if challenged.

Early retirement

Although there's no longer a default retirement age, many pension schemes will still have a 'retirement date' (especially in the case of defined benefit schemes) and may apply a penalty if benefits are taken before this date. However, if an employee continues working past the scheme's retirement age, they should still be entitled to appropriate contributions, unless there's an objective justification against this.

But the lack of a default retirement age doesn't prevent an employee from:

• having a contractual right to retire at a specific age, or
• retiring earlier by mutual agreement with their employer

Age discrimination and age related pension contributions

It's become fairly common practice for employer pension contributions to increase as members get older; recognising that the less time a fund is invested for, the more has to be paid in to provide the same relative pension pot at pension age. Traditionally, however, the actual payment levels have been driven more by goodwill than actuarial science.

Age related pension contributions are still allowed, but only where the contributions are designed to:

• equalise the benefits that members of different ages in comparable situations will receive from the pension scheme, or
• make those benefits "more nearly equal"

Unfortunately, there's no clear guidance on what's needed to justify age related contributions. For example, it's not clear:

• how many age related contribution bands are needed, or
• how often contribution rates have to be reviewed to take account of changes in financial conditions or mortality rates.

The right answer for any given employer or pension scheme will very much be driven by the particular circumstances involved. This is an area where legal advice is crucial and where actuarial guidance may sometimes be needed.

Age discrimination: pension exemptions and ‘objective justification’

Age discrimination in pension provision is allowed in some limited circumstances, either where there is an exemption for the age related practice or objective justification for it.

Exemptions

There are various specific exemptions in UK law for age related pension practices.

However, as the exemptions are based on the government's interpretation of what the European law requires, there's always a risk that they could be challenged in the European courts (as has happened occasionally with other UK law in the past).

Personal pension exemptions
For personal pension schemes, only employer contributions (including access to these contributions) are covered. As well as the exemption for some age related contributions, the following age related practices are allowed under personal pension schemes:

• setting a lower age limit to qualify for pension contributions
• setting a minimum period of employment to qualify for pension contributions (but if this is more than five years, it must be justified by a business need of the employer)
• setting a limit on the amount of salary that qualifies for pension contributions
• making the same pension contributions for all employees regardless of age
• making different pension contributions based on length of service (but if an employee with more than five years service is disadvantaged, this must be justified by a business need of the employer)
• making different rates of pension contribution for employees with different salaries

Occupational pension exemptions
Occupational pension schemes can also take advantage of the exemptions available to personal pension schemes. In addition, there are various exemptions specifically for occupational pension schemes - in particular, the following common occupational pension practices are covered by the exemptions:

• setting an upper age limit for joining a scheme
• setting a minimum level of pensionable salary to qualify to join (as long as the minimum salary is not more than 1.5 times the lower earnings limit or a similar amount intended to reflect the State pension)
• not allowing pension transfers for members over a set age (no lower than one year before normal pension age)
• setting a minimum age to take retirement, or ill-health, benefits
• paying bridging pensions
• only providing pension increases for pensioners aged over 55
• providing different pension increases to different pensioners, where the aim is to maintain the relative purchasing power of those pensions
• closing a scheme, or a section of a scheme, to new joiners
• providing different benefits for those joining after a certain date

Where defined benefits are concerned, there are also exemptions that allow:

• the number of years service that qualify for pension accrual to be capped
• actuarial factors to be used to calculate early or late retirement benefits
• survivors' pensions to be based on the member's prospective service to pension age
• survivors' pensions to be reduced actuarially based on the survivor's age

There's no exemption allowing discretionary early payment of defined benefits without actuarial reduction, except on grounds of ill-health or redundancy (or where members had a right to such benefits on 1 December 2006).

Other pension exemptions
As the age discrimination legislation only affects employment related pensions, it has no impact on:

• State pensions
• pension sharing arrangements on divorce (or dissolution of civil partnership)
• pension annuities bought from insurance companies by individuals

Insured benefits
The rules allow an upper age limit to be set for insured benefits provided by an employer. These include:

• insured death-in-service cover
• accident and sickness cover and
• private medical insurance

An employer can stop offering these types of benefits at the later of age 65 and State Pension Age.

Objective justification

If a discriminatory practice isn't covered by an exemption, it could still be legal under UK law if it can be objectively justified. But what is objective justification?

Treating people differently depending on their age can be objectively justified if:

• it's needed to meet a legitimate aim and
  
• it's an appropriate and proportionate way of meeting that aim

There are no hard and fast rules as to what is a legitimate aim - each situation has to be considered on its own merits. For example, the following are the kind of aims that might give objective justification:

• providing for a need (for example, on death or ill-health)
• taking account of practical factors (for example, basing retirement on the physical requirements of a particular employment)
• recruiting or retaining staff
• rewarding loyalty (for example, by providing service related benefits or contributions)
• meeting the legitimate expectations of existing staff or pension scheme members
• allowing for succession planning and fairness between generations of employees
• containing costs to protect the pension scheme

To decide if the discrimination is appropriate and proportionate, the trustees or employer have to weigh up whether there's another less discriminatory way of meeting the aim. If there is, the other option should be used.

Where the objective justification route is being used, there should be evidence to support the need for age discrimination and the way that need has been met. The evidence will have to be robust enough to stand up to scrutiny if challenged.