Consultation re: Pension Contributions after a TUPE Transfer


Introduction

On 25 February 2013, the DWP issued a consultation on draft regulations to amend the requirements for pension contributions following a TUPE transfer.

In this Alert:


Key points

  • The proposed changes aim to make clear that, following a TUPE transfer, an employee may choose the level of their pension contributions (subject to any minimum specified by the scheme’s trust deed and rules).
  • However, so a buyer is not compelled to pay contributions in excess of those required under the automatic enrolment regime, it will be allowed to match the level of pension contributions paid by the seller prior to the transfer rather than the level chosen by the employee.

Background

TUPE usually applies on the transfer of a business, as a going concern, from one entity to another. In broad terms, it transfers the obligations of the original employer (the “seller”) in relation to the transferring employees’ contracts of employment (and rights and obligations arising from the employment relationship generally) to the new employer (the “buyer”). But, rights under occupational pension schemes which relate to old age, invalidity or survivors’ benefits do not transfer.

With the aim of providing some degree of pension protection to transferring employees, the Government introduced a requirement (in the Pensions Act 2004) for buyers to provide a certain level of benefits following a TUPE transfer.1


Changes to pension protection on a TUPE transfer

With effect from 6 April 2005, whenever TUPE applies to a transfer, and the seller has an occupational pension scheme, the buyer must offer a prescribed minimum level of pension benefits to transferring employees.2

The buyer can dictate the nature of the pension arrangement and the level and form of the benefits it provides, subject to the following minimum requirements:

  • a DB scheme must either satisfy the reference scheme test, or provide benefits the value of which “equals or exceeds 6% of pensionable pay for each year of employment” in addition to any employee contributions; or
  • if a DC scheme is used, the buyer has to match the employees’ contributions up to a maximum of 6% of basic pay.

Automatic enrolment and contributions to a DC scheme

Since 1 October 2012, employers are required to enrol their “eligible jobholders”3 into a qualifying pension scheme.

The quality test for a DC scheme is based on the contributions made to the arrangement. By the end of the transitional period (during which contributions are phased in, starting with 1% each from the employer and the employee), contributions payable in respect of the jobholder must be at least 8% of qualifying earnings overall, with a minimum contribution of 3% from the employer.


Proposed changes

When the TUPE pension protections were introduced in 2005, the DWP intended an individual to be able to choose the level of their pension contributions post transfer. The proposed amendment aims to make this clear. However, importantly, the buyer will be able to match the level of pension contributions paid by the seller prior to the transfer, rather than the level chosen by the employee.

Without this protection an individual could require the buyer to pay contributions at a rate of 6% of basic pay, instead of a (lower) auto-enrolment rate. Not only would this be an additional burden on employers, but it would also put the employee in a more favourable position than they would have been prior to transfer and, potentially, in a more favourable position than their peers in the buyer’s pension scheme.

However, if the buyer decides to match the employee’s rate, its contributions will not be required to exceed 6% of the employee’s basic pay.


Next steps

The consultation, to which we will be responding, closes on 5 April 2013. The changes are due to come into force on 1 October 2013.


1 Please see our Newsletter:”TUPE transfers – new pension protection” (March 2005)
2 Transferring employees include members of the seller’s scheme, those eligible for membership and anyone in a waiting period
3 Workers between the ages of 22 and state pension age who earn more than the “minimum earnings threshold” (£8,105 for the tax year 2012/13)