Since the European Court of Justice (ECJ) rulings in the Beckmann and Martin cases, it has been widely accepted that benefits payable on early retirement typically transfer from one employer to another when part of a TUPE transfer
As such, it is common to make provision in sale and purchase agreements recognising this potential transfer of liability.
In Beckmann and Martin, the ECJ ruled on the interpretation of 'old age, invalidity or survivors' benefits' within the Transfer of Undertakings (Protection of Employment) Regulations 1981; now replaced by the 2006 regulations of the same name.
A recent case, The Procter & Gamble Company (P&G) v Svenska Cellulosa Aktiebolaget SCA and another (SCA), considers these issues in the context of a purchase price adjustment.
The case concerned the sale of P&G's European tissue towel business to SCA. The sale and purchase agreement made provision for adjustments to the purchase price to take account of pension liabilities within various jurisdictions where transfers were taking place.
The sale and purchase agreement provided for an actuarial valuation of the liabilities of the P&G pension fund 'for and in respect of each transferring employee in respect of accrued pensionable service' who transfer to SCA, and for P&G to cover SCA's liability through an adjustment to the purchase price.
Commonly, such potential liability is addressed by way of indemnities, but in this case a mechanism for adjusting the purchase price was agreed, meaning the impact of the protection afforded to SCA by P&G was immediate.
The parties' view of the adjustment varied significantly, with P&G's actuaries saying it was zero, while SCA's actuaries put it at £19m.
The dispute raised the two key questions:
- whether the provision for early retirement benefits in the P&G fund were obligations which transferred to SCA by operation of TUPE
- whether the obligation, so transferred, is a liability to be taken into account when calculating the adjustment to the purchase price
There were two early retirement benefits under consideration. The first related to rights to a smaller reduction on receipt of a pension due to early retirement. Broadly, where a member had 15 years' pensionable service, they would benefit from a lower reduction in their pension for early payment. The second was a right to a bridging pension: a higher pension before state pension age, followed by a lower pension at state pension age.
The judge concluded that these benefits - described as 'the enhancements' - transferred. This was on the basis that TUPE does not just relate to contractual liabilities, but also covers 'rights and obligations', and 'rights, powers, duties and liabilities' which arise from a contract of employment/ employment relationship.
The fact that the benefits were subject to consent and to P&G's discretion to amend the scheme to remove those benefits (at least for the future) was not, in the judge's view, sufficient grounds for concluding that they did not transfer.
The judge also looked at how the deferred pension which had accrued in the P&G fund should be treated.
This was described in the case as the 'smiling pensioner' issue, and related to whether the deferred pension should be taken into account when calculating the liabilities which transferred; or whether a transferring employee could claim entitlement to those benefits from his former employer and his new employer.
This argument was raised by SCA, which would have benefited from the £19m adjustment if this were the case.
The judge said such duplication of liability could not have been intended under TUPE, and held that only the liability for the enhancements transferred.
Finally, the judge looked at the Beckmann and Martin cases to see whether the fact that they related to benefits payable on redundancy was relevant in a case covering benefits partly payable after normal retirement age.
The judge concluded that an early retirement benefit still becomes an 'old age' benefit on reaching normal retirement age, but it is difficult to see how the effects of this conclusion operate in practice. If rights to old age benefits do not transfer, that suggests the early retirement enhancement can stop at a scheme's normal retirement age.
However, although by definition a bridging pension ceases at state pension age, an early retirement pension does not normally stop or reduce on reaching a scheme's normal retirement age and there is legislation limiting the ability to do so.
There were two questions the judge left unanswered:
whether Beckmann and Martin can be distinguished on the grounds that they related to public sector arrangements
whether the obligation to pay benefits is borne by the trustees rather than the employer
He observed that as he had reached a clear conclusion without considering them, there was no need to answer those questions, while hinting that they might require consideration by the ECJ.
The case confirms that close scrutiny of pension arrangements before agreeing the terms of such a transfer is vital to ensure that any rights to benefits that may transfer under TUPE are provided for in the agreement.
Indemnities are usually more common, but an adjustment to the purchase price, if agreed to by the vendor, has a more immediate benefit for purchasers.