Transfer of a Business and Pension Rights - Briefing Note

The Pensions Act 2004 and the Transfer of Employment (Pension Protection) Regulations 2005 make alterations to the obligations imposed when a business is sold or transferred.

The Position Prior to the Pension Act and the Regulations

The 1981 Transfer of Undertakings (Protection of Employment) Regulations provided that on the sale or transfer of a business the employment contracts of all its employees automatically transferred to the purchasing or transferee business. Benefits relating to old age were excluded and thus pensions generally did not transfer with two exceptions:

• in 2002 the European Court of Justice ruled that early retirement benefits payable upon dismissal or redundancy did not fall within the exclusion; and

• contractual obligations by employers to contribute to personal pension plans.

The New Position

If employees have access to an occupational pension scheme prior to transfer then:

• the transferee is obliged to provide those who are active scheme members, eligible to join or in a waiting period to join a scheme with an occupational pension scheme;

• the obligation is to provide an occupational scheme, not an identical scheme; a particularly generous defined benefit scheme does not have to be replicated.

The transferee may choose to provide a defined benefit scheme (also known as a final salary scheme), a money purchase scheme or a stakeholder scheme provided that it complies with the following statutory requirements:

• Defined Benefit Scheme with benefits equal to at least 6 per cent of employees’ pensionable pay (to be defined by the scheme rules) annually in addition to employee contributions and employees should not be required to contribute more than 6 per cent. The transferee must contribute for active members;

• Stakeholder or Money Purchase Schemes. The transferee is obliged to match employee contributions up to 6 per cent of pensionable pay annually. In this case pensionable pay includes only basic pay and disregards payments such as bonus pay, commission and overtime.

Checklist for New Employers

If a pension scheme is already in place:

• check that the employer contributions will be sufficient; and

• if the rules of the scheme stipulate a maximum contribution of less than the required amount then the rules may have to be amended. Legal advice and cost analysis will be necessary.

Where there is not a pension scheme in place:

• careful financial and legal advice will be needed to choose the scheme which will be most suitable. Contributions to pension schemes can be a considerable expense;

• the existing exceptions of redundancies and personal pension plans still apply therefore it remains necessary to consider these in due diligence.

Additional Voluntary Contributions are not excluded from basic pay in the case of defined benefit/ stakeholder schemes and may increase the employer’s contribution.

The changes will affect business transfers which took place after 6 April 2005. The Act does allow the employer and employee to agree to contract out of the provisions at any time after the transfer.

If you are considering the acquisition of a business, take advice from the start to make sure your decision is based on a full understanding of the legal and financial issues involved. We can guide you through this process.