Managing pensions in commercial outsourcing

Source: Workplacelaw

The issue of TUPE is complex, and many employers struggle with its finer points. Pensions are a particularly contentious issue in TUPE transfers, and have many hidden complications. TUPE will apply to most commercial outsourcings. But the transferee employer (i.e. the new employer) does not have to provide the same old age, invalidity or survivors benefits after transfer as the transferor employer (i.e. the old employer) provided under its occupational pension scheme pre transfer.

Minimum pension protections

However, the Pensions Act 2004 obliges the transferee to provide a minimum level of pension protection for transferring employees.

This applies if, immediately before the transfer, the transferring employee was a member of, entitled to join, or in a waiting period to join the transferor's scheme (defined contribution (DC) or a defined benefits (DB)).

What kind of pension scheme post transfer?

The transferee can choose whether to offer a DC or DB scheme post-transfer. Its scheme must comply with a minimum standard. This is:

1) a DB scheme of a minimum standard (broadly speaking one providing benefits based on a 1/80ths accrual with pension payable at age 65); or

2) a DC scheme (including a stakeholder scheme) with matching employee/employee contributions of up to 6% of basic salary.

What causes the difficulty?

So far it all seems all very straight-forward. Sometimes it is. The difficulty arises when the transferor's occupational pension scheme provides benefits that fall outside the TUPE exemption for old age, invalidity and survivors benefits. Not all the benefits occupational pension schemes provide fall within the TUPE exemption. The transferor will have to provide the non-exempt benefits.

The kind of non-exempt pension benefits that could potentially transfer under TUPE were the subject of two European Court of Justice cases, both involving public sector pension schemes. The Beckmann case involved enhanced pension benefits payable on redundancy. The Martin case involved enhanced early retirement benefits payable before normal retirement age in connection with dismissal.

How does this affect commercial outsourcing?

The transferee employer's preferred pension option might be a modest DC scheme. It wants its pension obligations to stop there. Beckmann / Martin impose further obligations.

This has implications for pension delivery and cost. Enhanced pension benefits on redundancy can be expensive. The cost could be commercially disproportionate. The transferee employer may look to the transferor employer for protections, particularly on termination.

But the transferor may be unwilling to accept a future liability that is contingent upon a decision that it does not make (e.g. if the transferee decides to make its employees redundant).

Keeping it in perspective

Even if these benefits exist, transferring employees may not satisfy the eligibility criteria for them during the contract term. Practical due diligence should be undertaken to identify how significant any potential exposure really is. There may, since December 2006, also be age discrimination issues.

Irrespective of TUPE considerations, some organisations require the service provider to provide pension benefits that are much more generous. What these are, and how they are agreed, is a matter for negotiation and contract. Historically “paternalistic” employers with final salary pension schemes required service providers to provide a broadly comparable pension scheme. More recently, solutions have been emerging that meet the transferor's corporate strategy but are more in line with market practice.