Sackers’ Response to DWP Consultation on amendments to TUPE


Background

The DWP consultation on the draft Transfer of Employment (Pension Protection) Amendment Regulations 2013 seeks to:

  • clarify the DWP’s original policy intention in relation to pension protection following a transfer of employment under TUPE; and
  • align the pension protection requirements following a transfer more closely with the auto-enrolment legislation.

In this response:

Policy Intention of TUPE

Our understanding of the DWP’s proposal is that, following a transfer under TUPE, pension scheme members will be permitted to choose the rate at which they pay pension contributions, to be matched by their employer up to a maximum of 6% of pensionable pay. Our understanding is that this reflects the original policy intention, but that there is a concern that the 2005 Regulations do not clearly achieve that intention. In our view, as drafted, the proposed amendment does not fully achieve the DWP’s policy intention.

Draft regulation 3(1D) does not make explicit provision for a transferring employee to choose the rate at which they pay contributions following a TUPE transfer. This could be achieved by inserting the words “at the rate selected by the employee” after the words “equal to the contributions made by the employee”. For ease of administration, we also suggest that the ability for an employee to choose his/her contribution rate should be subject to the ability for employers to restrict that rate so as to avoid fractional amounts.

Draft regulation 3(1C) requires a transferor’s contributions to be at least matched by the transferee following the transfer. It envisages that both the transferor and transferee operate DC schemes and does not take account of the fact that transferring members may have had DB pension scheme membership prior to the transfer. The level of contributions payable in the DB scheme is not an accurate measurement of the value of the benefit.

Interaction between TUPE and contribution levels

Contribution levels

The Pensions Act 2008 specifies a minimum rate of contributions for jobholders who are automatically enrolled into a qualifying pension scheme. As the consultation notes, the minimum contribution requirement will be phased in, so that between July 2012 and September 2017, the minimum contribution will be 2% of earnings, increasing to 5% for the period between October 2017 and September 2018 and 8% from October 2018. Following a TUPE transfer, the ability of transferring employees to select the level of their contributions, and thereby set the minimum level of contributions payable by the receiving employer, could lead to the receiving employer being obliged to pay higher pension contributions than the transferring employer was paying prior to the transfer. Such employees would therefore be placed in a more favourable position than they would have been in had they remained with the transferor.

The consultation notes that the DWP intends to address this mismatch by allowing transferring employers to satisfy the requirement to pay “relevant contributions” “by matching the contributions paid by the transferor immediately prior to the transfer as an alternative to matching the level of contributions chosen by the employee” and leaving the transferee to decide how they will meet their pension protection obligations.

‘Contractual’ enrolment

The proposed amendments appear to envisage that all employers will use the ‘statutory’ route under the Pensions Act 2008 to achieve compliance with the employer duty of auto-enrolment. But in practice, a number of employers are choosing to use ‘contractual’ enrolment as a means of bringing their workforce into pension saving. In other words, they are making pension saving (which may go beyond the requirements set out in the Pensions Act 2008) a term of the employment contract. Is it the DWP’s intention that such contractual arrangements should also benefit from the same easement that the present draft regulations seek to provide?

Selecting contributions

Draft regulation 3(1C) is drafted in such a way that would permit the provisions of the 2005 Regulations to be overridden in all circumstances, not simply where the auto-enrolment rules require a lower contribution. For example, should the member be able to select a level of contributions that they would have been entitled to choose in the transferor’s scheme rather than the contributions that were in fact being paid in respect of that member?

Opt-outs

As drafted, the regulations would allow jobholders who opt out of auto-enrolment pension saving prior to a TUPE transfer to benefit from a higher contribution rate than their counterparts who remain auto-enrolled. Is the policy intention that, in relation to such individuals, the receiving employer can satisfy TUPE by offering contributions on the same basis as would have applied in the qualifying scheme for auto-enrolment purposes as if they had not opted out? In addition, individuals who have opted out of a qualifying scheme may have chosen to do so to take advantage of alternative benefits (which may include higher contributions). As drafted, they could risk losing any better benefits.

DB schemes

Draft regulation 3(1C) does not envisage the use of DB schemes for auto-enrolment. While the use of DB schemes for auto-enrolment is not common, it is an option used by some employers. Is the policy intention to limit the application of the easement to situations where the transferor’s scheme provides money purchase benefits only?

Scheme rules

As drafted, the requirement in regulation 3(1D) to make contributions “being permitted under the scheme rules” would (to take an extreme example) potentially allow an employer to structure its scheme rules so that no pension contributions were payable. This provision also envisages that only trust based schemes will be used by transferee employers, whereas in practice, contract based schemes are commonly used to fulfil a transferor’s obligation under TUPE.

General comment

For these reasons, we consider that the proposed amendments to the 2005 Regulations do not meet the policy intention of removing the risk that transferee employers might face substantially higher pension contributions than the transferor employer. Further work is required in several areas.

Additional Comments

The reference in draft regulation 2(1A) to section 258(2)(h) of the Pensions Act 2004 is a typographical error (as there is no such section). We assume the intended reference is to 258(2)(b).

The present draft amending regulations provide an opportunity to repeal regulation 3(3) of the 2005 regulations, in the light of the abolition of protected rights from 6 April 2006.

Finally, given that the present draft regulations are intended to clarify the DWP’s original policy intentions in relation to the 2005 regulations, is it intended that the amendments are to have retrospective effect to 6 April 2005?