United States: Occupational Pension Schemes and Transfers of Undertakings: Do Early Retirement Benefits Transfer?

By John J. Papadakis and Martin Scott

The Transfer of Undertakings (Protection of Employment) Regulations 1981 ("TUPE"), which transpose the EC Acquired Rights Directive (77/187/EC) into UK law, are applicable upon the transfer of an undertaking or business (or part of a business) to another employer. The basic effect of TUPE is that the purchaser of the business will take on all of the seller's obligations and liabilities in relation to the employees of the transferred business, relating to both their past and future service. The purchaser effectively "steps into the shoes" of the seller with respect to the employees. However, there is an exception to this: the transfer of these employee-related obligations does not apply to "old age, invalidity or survivors' benefits" payable under an occupational pension scheme. This is commonly known as the "pensions exemption".

It had previously been thought that the "pensions exemption" meant that employees' benefits under an occupational pension scheme would not transfer to the purchaser upon the transfer of a business. However, recent ECJ case law (Beckmann¹ and, in particular, Martin v South Bank University²) now suggests that, on the transfer of a business, responsibility for providing certain early retirement benefits under an occupational pension scheme may transfer to the new employer.

Three lecturers were employed at an NHS nursing training college under the conditions of employment of the General Whitely Council, and were members of the NHS superannuation scheme. Benefits under that scheme included enhanced benefits on early retirement aged between 50 and normal retirement age if: (i) they were dismissed by reason of redundancy; (ii) they took voluntary early retirement following an organisational change; or (iii) they took early retirement "in the interests of the efficiency of the service".

In 1994, the college became part of South Bank University. The three lecturers were informed that they would now be employed by South Bank University and that, although they were not obliged to accept the terms and conditions of employment of the university, they would not be able to remain members of the NHS superannuation scheme. They therefore joined the Teachers' superannuation scheme, but they did not accept the terms and conditions of employment of the university and remained on the terms and conditions of their employment contracts at the time of the transfer. The Teachers' superannuation scheme provided less generous benefits.

Two of the lecturers subsequently took early retirement in circumstances which the employment tribunal found to be "in the interests of the efficiency of the service". They complained to the employment tribunal that the university should provide them with early retirement benefits which were as good as those they were previously entitled to. The tribunal referred to the ECJ for a preliminary ruling.

The ECJ held as follows:

• Rights that are contingent upon dismissal or the grant of early retirement by agreement with the employer do fall within the concept of rights and obligations arising from an employment relationship within the meaning of the EC Directive.

• Early retirement benefits and benefits intended to enhance the conditions of such retirement, paid in the event of early retirement arising by agreement between the employer and the employee to employees who have reached a certain age, are not old age, invalidity or survivors' benefits, and therefore do not fall within the "pensions exemption" to TUPE. The ECJ decided that only benefits which are paid when an employee reaches the end of his normal working life as laid down by the general structure of the pension scheme in question can be classified as old age benefits. Obligations arising upon the grant of early retirement arising from a contract of employment, employment relationship or a collective agreement which bind the seller as far as the employees are concerned are transferred to the purchaser.

• Transferred employees could not waive the rights to early retirement benefits conferred by the Directive, and those rights could not be restricted even with their consent. However, in so far as national law allows the employment relationship to be altered in a manner unfavourable to employees in situations other than the transfer of an undertaking, an employee can agree to his employment benefits being altered by the purchaser provided the transfer of the undertaking is not the reason for the change.

• Where the purchaser has, in breach of its obligations under TUPE, offered transferred employees early retirement which is less favourable than that to which they were entitled under their employment relationship with the seller, the purchaser has a duty to ensure that the relevant employees are accorded early retirement on the terms to which they were entitled under their employment relationship with the seller.

There are differences between the pension scheme in this case and a standard trust-based UK exempt-approved occupational pension scheme. In particular, the pension paid in the Martin case was a compensation payment paid to normal retirement date, rather than for life. The ECJ, however, ruled in wide terms and determined that the "pension exemption" should be interpreted narrowly. Consequently, there is a respectable argument that TUPE will apply to early retirement benefits, although there are practical difficulties in applying the judgement to a trust-based scheme. For example, how are accrued benefits in the transferor's pension scheme treated ? Moreover, there is no reason why the decision should not affect past service liabilities as well as future service liabilities.

Unfortunately, the case leaves a lot of questions unanswered. Until further guidance is given on the scope of the decision, it will be difficult (if not impossible) to advise definitively. In the meantime, sellers and purchasers should seek appropriate indemnities.