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TUPE and early retirement benefits

24 May 2012 #Employment


Procter & Gamble Company v SCA and another [2012] EWHC 1257 (Ch).

This case seeks to clarify an issue, one of many, left unresolved by the ECJ decisions in Beckmann and Martin concerning pensions and TUPE. It cannot overrule those ECJ decisions, being a first instance decision of the High Court.

Regulation 10(2) of TUPE 2006 provides:

"any provisions of an occupational pension scheme which do not relate to benefits for old age, invalidity or survivors shall be treated as not being part of the scheme."

The effect of regulation 10(2) is to take out from the scope of the TUPE pensions exception any provisions of an occupational pension scheme that do not relate to benefits for old age, invalidity or survivors.

In Beckmann v Dynamco Whicheloe Macfarlane Ltd [2002] IRLR 578, the ECJ concluded (in relation to the TUPE Regulations 1981) that redundancy benefits - because they were not paid at the end of normal working life - could not be classed as old age benefits. Therefore these benefits fell outside of the pensions exception and transferred under TUPE. The case was referred back to the UK High Court but settled before it was heard.

Martin v South Bank University [2004] IRLR 74 the ECJ`s found that early retirement benefits (and benefits intended to enhance the conditions of such early retirement) paid to those who have reached a certain age where early retirement arises by agreement between the employer and the employee are not old age, invalidity or survivors` benefits and also fell outside of the pensions exception and, again, transferred under TUPE.

Many questions remain unanswered following the ECJ`s decisions in Beckmann and Martin. It was hoped that some of these would be resolved by TUPE 2006 when it came into force, but unfortunately that did not happen.

In March 2007, Procter & Gamble (P&G) agreed to sell its European tissue towel business to SCA. The transaction included a TUPE transfer of 129 P&G employees based in Manchester to SCA. The transferring employees were active members of the defined benefit section of the Procter & Gamble Pension Fund.

The business sale agreement provided that SCA would be liable for any accrued pension liabilities that passed to it under TUPE, with a price adjustment mechanism such that the price would be reduced to reflect these liabilities. There was no “Beckmann” indemnity in the agreement. SCA refused P&G`s offer to include one.

The pension fund`s governing rules provided for a normal retirement age (NRA) of 65. Early retirement was permitted, with the consent of the employer, for both active and deferred members on or after reaching age 55. Early retirement pensions were discounted for early payment before NRA by differing amounts depending on whether a member had accrued 15 or more years of continuous service on retiring.

Following the asset sale, a disagreement arose as to:

  • Whether the transferring employees` rights to early retirement benefits from the pension fund transferred under TUPE to SCA.
  • If these rights transferred, whether they constituted a liability that had to be taken into account in adjusting the purchase price under the sale agreement.

SCA asserted that early retirement rights in respect of the transferring employees had transferred under TUPE and the additional liability imposed dictated that the purchase price under the sale agreement needed adjustment. SCA`s actuary calculated that an adjustment of £19 million was required.

P&G disputed SCA`s interpretation of the agreement. Its actuary calculated that no adjustment to the purchase price was required. P&G started proceedings in the High Court to obtain clarification about the correct construction of the agreement and impact of TUPE.

Three issues were considered by the court:

  • Which rights transferred under TUPE?

SCA contended that the ECJ decision in Martin demonstrated that rights to an early retirement pension fell within the scope of the "rights and obligations" covered by Article 3(1) of the ARD 2001 and transferred under TUPE.

  • Did liability for full early retirement benefits transfer under TUPE or just for the enhanced elements?

P&G argued that since the transferring employees retained rights to deferred pensions in the pension fund, the transfer under TUPE of liability for full early retirement pensions would lead to double recovery. This was referred to as the "double pension problem". SCA maintained that this outcome was appropriate, since the obligation to ensure full funding of the transferring employees` interests passed to it under TUPE as well.

  • What was the scope of an "old age benefit" referred to in regulation 10(2)? SCA argued that Beckmann and Martin made clear that a pension providing a unitary benefit payment that came into payment before NRA could not be an old-age benefit under regulation 10(2). P&G disputed this, arguing that neither case was directly on point as they concerned benefits exclusively payable before NRA.

Decision

The High Court ruled in favour of SCA in relation to the first question, and in favour of P&G on the other two questions, as explained below:

  • Did liability for full early retirement benefits transfer under TUPE or just for the enhanced elements? The liability transferring under TUPE was the liability to provide enhancements, not the full early retirement benefits. These enhancements stopped being available to transferring employees when they ceased being active members in the pension fund. Rights and benefits which had been met in economic substance by virtue of transferring members becoming entitled to deferred pensions in the P&G Fund did not transfer.

The intention of the sale agreement was to reimburse SCA for liabilities transferring under TUPE. It was never intended to give SCA a windfall profit.

  • What was the scope of an "old-age benefit" referred to in regulation 10(2)? It was "plain and obvious" that pension instalments paid to a member after NRA should be characterised as old-age benefits, where the sole purpose of the pension was to support the recipient after retirement having attained a specified age and without any other trigger. The fact the pension first came into payment before NRA was irrelevant.

Considering Beckmann and Martin, there was nothing in either case to force the court to conclude that "a pension being paid to a 100-year old is not an old-age benefit simply because by consent of the employer it initiated at 64 and not 65" . This accorded with the opinion of the Advocate-General in Beckmann, even if it was not confirmed by ECJ.

Comment

While this judgment resolves some of the outstanding questions about Beckmann liabilities, it throws up new questions of its own. In any event, it is understood that SCA is likely to appeal against the High Court decision.

The case gives a clearer idea of the scope of Beckmann rights. However, how is the buyer to exercise the role of the participating employer in the seller`s scheme in giving consent to early retirement? What constraints will the buyer operate under in undertaking this role? Is it really possible to value the right to be considered for early retirement, notwithstanding the High Court finding that this could be done?

Parties to TUPE transfers should still give consideration to Beckmann indemnities although this case will have a bearing on the negotiating position where there are issues regarding early retirement provisions.

Clarkslegal, specialist Employment lawyers in London, Reading and throughout the Thames Valley.
For further information about this or any other Employment matter please contact Clarkslegal's employment team by email at employmentunit@clarkslegal.com by telephone 020 7539 8000 (London office), 0118 958 5321 (Reading office) or by completing the form on this page.

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