07 February 2013 - Post by:Robert Tellwright
What early retirement pension benefits does an employer need to provide when taking on employees on a business transfer? And how should the employer provide them?
Last year the High Court confirmed that enhanced early retirement rights under occupational pension schemes can transfer with the member on a TUPE transfer (Procter & Gamble v SCA). In July, Mervyn Parry posted about some of the questions left unanswered by this case (Early retirement rights and TUPE – where next?). These unanswered questions are now turning into real lurking obstacles which employers are finding difficult to navigate. Here are a couple of examples we’ve seen recently.
Take an employee who TUPE-transferred from Employer A to Employer B ten years ago. Employer A’s pension scheme entitled active members to an unreduced pension if they retire early – aged 50 or over – due to redundancy. No such enhancement is available to deferred members. Because the right does not relate to a benefit payable on old age, invalidity or death, it would seem (following Procter & Gamble) that the obligation to provide this benefit passes to Employer B under TUPE.
Employer B is now considering redundancies but it needs to be wary of these enhanced early retirement rights. To pay these enhanced benefits in a tax efficient way, Employer B wants to provide them through a registered pension scheme. But this could be difficult because, according to the judge in Procter & Gamble, Hildyard J, only liability for pension payable before normal pension age actually transfers under TUPE. However, the tax rules say that a scheme pension must not normally be reduced once it comes into payment. So how can Employer B pay a pension from a registered pension scheme to cover those enhanced early retirement rights, which stops when the member hits normal pension age?
The employee’s age may also be an issue. Employer B’s pension scheme may not be able to pay benefits from age 50, because the normal minimum pension age increased from 50 to 55 in April 2010. So Employer B would need to check whether the employee has a protected pension age of 50. If he does not, could Employer B argue that the terms of the original deal with the employee have changed as a result in the change of tax laws, so the employee will need to wait until age 55 to take his benefits? He may dispute this.
Employer B may therefore consider paying these benefits directly to the former employee outside the registered pension scheme regime, or persuade the individual to wait until age 55. If the latter, should there be an actuarial uplift on account of late payment? This could be an augmentation of the member’s benefits so you then need to consider the possible impact on the member’s annual allowance, and so on…
Difficult questions also arise if the employee’s past service benefits have been left behind in Employer A’s scheme. Here, Employer B will want to find out when the individual can require (or request) his benefits to be paid unreduced from Employer A’s scheme. This is because Employer B may need to pay instalments of unreduced pension directly to the former employee until at least this time. That raises another question: what if the member can ask Employer A for his unreduced pension at say age 60, but Employer A says no? Must Employer B continue paying these instalments until the individual’s normal retirement date?
These examples are merely the tip of an iceberg; an iceberg of pretty much unfathomable depth and complexity. Procter & Gamble is now being appealed, but surely the Department for Work and Pensions now needs to take the helm, and steer these developments in TUPE laws onto a different, safer course?
Robert Tellwright is a senior associate at Allen & Overy LLP.