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Pensions and TUPE - The tricky issues - 2017

19 June 2017

During this webinar, Liz Wood and Jennifer Lewis will also cover recent case law developments on TUPE and pensions.

Transcript

Siobhan Bishop: Hello and welcome to this Gowling WLG TUPE Club Webinar on Pensions and TUPE - The Tricky Issues.

I'm Siobhan Bishop from the Employment, Labour and Equalities Team and I'm joined today by Liz Wood, a Director in our Combined Human Resources Solutions Team, who has extensive experience on advising on both employment and pensions issues and the difficult crossover between those to. I'm also joined by Jenny Lewis who is a Principal Associate in the Pensions Team, who has particular expertise in public sector pensions and staff transfers from the public to the private sector.

The presentation will last about 50 minutes with some time for your questions at the end. Before we start I have a few housekeeping points. So the Webinar player has a few simple controls, the most important are the volume adjuster and the full screen option which are in the bottom of the right hand corner of the player. There are also some tabs along the top which you click on to access details of today's speakers and also the slides. You ask a question at any time and to do that click on the "ask a question" tab, type in your question and then click submit and we will try and answer as many as we can in the time available.

Finally there is a "poll" tab, don't worry too much about that. Towards the end of the Webinar, a poll will automatically flash upon your screen and we would really encourage you to participate in that.

Finally, if for any reason you can't see the current slide, just click on the "slides" tab to get back to it.

So, I would like to welcome Liz Wood who is going to take us through what we're covering today.

Liz Wood: Thanks Siobhan.

Well, how pensions should be dealt with when a TUPE transfer takes place is undoubtedly a complex area and one which can easily trip you up if you are not aware of the potential pitfalls.

Today's Webinar is intended to help guide you through the legal minefield that is TUPE and pensions, to help you understand where to begin if you are dealing with a TUPE transfer and understand where your obligations start and end. We are going to begin by considering why pensions are treated to other terms and conditions in a TUPE context. This is important because it provides context to what otherwise might seem to be a pretty unfathomable set of legal principles and rules. We will cover the impact of the pensions exclusions found in TUPE, both for the transferring employee and the original transferor employer and then we are going to focus in particular on the implications for the post transfer employer of the transferred staff, including the obligations to provide a pension once the transfer has taken place. What pension options are available to the new employer? What areas are unclear and how can this be practically managed?

Finally, for the last 15 minutes or so, my colleague Jenny Lewis will cover one of the tricky aspects arising from a particular type of TUPE transfer, that is the transfer of public sector employees.

I am sure that many of you will be very familiar with the circumstances in which a TUPE transfer - that is a transfer of employees that falls within a Transfer of Undertaking (Protection of Employment) Regulations 2006 - will apply. But by way of reminder, we are talking about either the sale of part or all of the business, so an asset, rather than a share, sale or a service provision change (shorthand for an outsourcing of services, a change of contractor, or an insourcing, so bringing services back in-house). Whether TUPE applies, a very fact specific analysis is required, and we are not going to cover aspects of that in today's Webinar.

But where you know that TUPE does apply, it has the effect of automatically transferring the employment of the affected employees from the old, pre-transfer employer to the new, post-transfer employer and I like to think of this as the new employer essentially stepping into the shoes of the old employer. The new employer becomes responsible for the vast majority of the rights, powers, duties and liabilities which were previously the responsibility of the old pre-transfer employer in relation to the transferring employees. So the new employer will be expected to honour pre-transfer commitments, so, for example, pay, holiday entitlement, benefits and other terms and conditions of employment.

Stepping into the shoes of the original employer is a neat concept but one which doesn't always easily work in practice. When the original TUPE legislation was put in place, it was accepted that there were going to be certain benefits which were going to be particularly problematic for a new transferee employer to provide. The most obvious example of this is the provision of a pension by a transferor employer. Pensions schemes and, in particular, occupational pension schemes, are set up by an employer and contain specific terms relating to the employee's intended treatment of its employees as members of the scheme. It was recognised that it would be cumbersome for a new transferee employer to provide the same sort of pension scheme or the same benefit structure as was on offer before the transfer if the usual automatic transfer principles found in TUPE applied.

In recognition of this, TUPE contains a broad exemption. This says that rights, liabilities, duties and obligations that relate to the old age, invalidity and survivors' benefits provided through an occupational pension scheme and relating to transferring employees are not subject to the usual TUPE principles. So, in other words and in very broad terms, this means that where an occupational pension scheme is offered to transferring employees before a TUPE transfer, the new employer has no obligation to continue to provide or replicate that arrangement. This is subject to some caveats and we'll come onto to consider those a little later.

If you're dealing with a TUPE transfer of some incoming employees, the first point of distinction to get clear in your mind is whether the transferring employees are offered occupational pension scheme benefits or personal pension scheme benefits. The type of scheme on offer before the transfer date isn't always straightforward. Don't assume, for example, that because a pension scheme is automatic enrolment compliant, for Pensions Act 2008 purposes, it will be one type of scheme or the other, because in our experience both occupational and personal pension schemes are regularly used as qualifying automatic enrolment pension schemes. It is also worth adding that I think ten years or so ago it might have been fair to say that occupational pension schemes were becoming less common, with so many employers closing those schemes. But actually I think that's less true now because occupational pension schemes, often in the form of master trust arrangements, are being chosen frequently by employers to discharge their automatic enrolment duties.

So, how do you identify an occupational pension scheme? Well, there is a very technical definition which is found in the Pension Schemes Act 1993. But practically you are essentially looking for a scheme that is set up by an employer to provide retirement benefits for its employees and it must have its main administration in the UK. It is usually going to be a trust based scheme, so you are looking for a dusty trust deed and rules. It often will provide defined benefits or final salary benefits. That's certainly true for the very traditional, older occupation pension schemes, but not always and occupational pension schemes may well also, or solely, provide defined contribution benefits and that is particularly true of master trust arrangements. Some of the very common master trusts that we now see in play, so for example the NEST scheme and the NOW pension scheme, these are all types of master trusts which are occupational pension schemes.

So what other pension schemes are out there? Well, personal pension schemes don't form part of the pensions exclusion found in TUPE. These pension arrangements are made directly between the employee and the provider, usually an insurance company, so the Legal & Generals, the Scottish Widows of this world. They're not specifically set up by an employer to provide benefits for its own employees. In this case, rights and liabilities associated with the personal pension scheme do transfer with the employee's employment, in line with standard TUPE principles. The most obvious impact of this would be that any commitment made by the pre-transfer employer to make a certain level of percentage contributions to a personal pension scheme or a group personal pension scheme would be an obligation which the post-transfer employer has to continue to provide following the TUPE transfer. So, for example, if you see that a pre-transfer employer committed to unusually high level of contributions to a personal pension scheme, for example 10% or 15% of pensionable pay, the post-transfer employer would be required to continue with this obligation following the transfer.

What is the impact of the pensions exclusion where an occupational pension scheme is on offer to the transferring employees immediately before the transfer? Well, the transferring employee won't have the benefit of ongoing membership of their pre-transfer occupational pension scheme and, as a starting point, that could result in a significant reduction in the amount of pension he or she was expecting had he or she remained in employment up to retirement, especially if the pre-transfer scheme on offer provided defined benefits. The employee at the point of the transfer becomes a deferred member of that occupational pension scheme and their deferred pension remains payable from their previous employer's pension scheme.

The transferor, in turn, remains responsible for the funding and the liabilities in respect of that old occupational pension scheme including insofar as it relates to the transferring employees. Meanwhile, the transferee employer doesn't assume responsibility for the scheme, its funding or providing benefits for the transferring employees, but that is subject to a very important caveat.

Importantly, the TUPE pensions exclusion is not a wholesale blanket exclusion. The pension's exclusion in TUPE is, on the one hand very wide. It refers to rights, powers, duties or liabilities arising in relation to a transferring employee's employment in connection with that occupational pension scheme. But importantly, I mentioned a few minutes ago that this is only to the extent that it provides 'old age, invalidity or survivors' benefits'. In layman's terms, these are the rights you would expect to be provided in a defined benefit pension scheme, so rights arising on the member reaching a certain age (for example retiring at 60 or 65), a pension being payable in circumstances of the member's ill health, or, for example, on the death of a member, a spouse or civil partner's pension being payable. These rights remain with the seller or transferor because of the pension scheme exclusion. But the fact that the pensions exclusion in the TUPE regulations specifically refers to 'old age, invalidity or survivors' benefits', begs the question could there be other rights in the occupational pension scheme which fall outside the pensions exclusion and therefore are liable to transfer? The short answer is yes.

This was clarified as a result of the two decisions we had in the early 2000s which made it clear that certain occupational pension scheme benefits in final salary schemes might not form part of the TUPE pensions exclusion. So, contingent rights, being rights that might not obviously be payable unless certain circumstances arise are liable to transfer to a new employer following a TUPE transfer. These two rights are pension scheme benefits payable on an employee's redundancy (and that was made clear by the Beckmann decision, which is a ECJ decision from 2002) and also pension scheme benefits payable on the early retirement of a member (and that was the Martin decision, also decided by the ECJ, in 2003). In both those cases, the ECJ's rationale was that neither of these benefits are payable on the member reaching old age or in the event of the member's ill health or on the member's death. So essentially, they fell outside the exclusion. These rights are generally referred to as 'Beckmann rights'. Whether these rights exist will largely depend on a good hard look at the rules of the pension scheme in question, preferably with a cold towel over your head, because the wording of these rules can be complex, archaic and hard to interpret.

So, what does this mean for the transferee employer? Well there's no doubt that this can mean a huge potential liability for a new employer, particularly if it knows it needs to make redundancies or create efficiencies, be that immediately following the TUPE transfer or many years after the event. The possible extent of the liability which a new employer might assume in relation to these Beckmann rights was a grey area for a number of years following the Beckmann and Martin decisions of the early 2000s. In particular, there were real question marks around whether a buyer or transferee would have to assume responsibility for the full cost of providing a redundancy or early retirement pension from the moment it was payable until the member's death. Fortunately, we've had some additional clarity provided over recent years, over the extent of the transferee's obligations to provide these types of benefits, particularly in the form of the Procter & Gamble High Court decision of 2012. This was all about the sale of Procter & Gamble's European tissue towel business, to a company called SCA.

So the key clarifications that we know now are the following: firstly, that the only rights which a transferee might be liable for under the Beckmann principles are the benefits which are payable before normal retirement age: i.e. from the date the redundancy pension comes into payment up to the scheme's normal retirement age. Secondly, the new employer is only liable for the value of the enhancement to any such pension scheme benefits, so the amount in excess of the normal deferred pension. This is important because it essentially caps the transferee's liabilities in respect of the pension. The pre-transfer employer remains responsible for funding and paying the bulk of the employee's pension in the form of the member's deferred benefits. Thirdly, the benefit is subject to a discretion under the old scheme. For example, the employer has to consent to the redundancy or the early retirement pension being payable, this discretion or consent provision transfers to the new employer along with the contingent rights. Essentially this goes back to the new employer stepping into the shoes of the old employer. This is a really helpful clarification because it means that the new employer could feasibly decline to give that consent to the redundancy payment being made in the first place subject to a reasonable expectation by the employee of being fairly treated.

Finally, connected to the first point, any benefits payable from normal retirement age, including where a pension is already in payment, are old age benefits and therefore are not the responsibility of the transferee. So, a right can change in nature from one form of benefit to another. This means a benefit might, for example, be a redundancy pension when it's first paid, when the member is made redundant. But once that member reaches normal retirement age, it's become an old age benefit and so under the pensions exclusion it then no longer becomes something which the transferee has any responsibility for.

There's no doubt that, despite the helpful clarifications we've had on the extent of the transferee employer's liability to provide redundancy and early retirement benefits this remains a really problematic area with no simple solutions. In particular, whilst the transferee's liability has undoubtedly been limited by the Procter & Gamble decision there still remain a number of unanswered questions. In particular, knowing at the point of the transfer exactly how much the Beckmann rights contained in transferor's pension scheme are worth in respect of the transferring employees. This will depend on a number of factors including the number of eligible employees, their age, their salary, their length of service, but also the likelihood of them actually being made redundant or eligible for early retirement following the transfer.

Secondly, there is a real question for transferees around how these rights can be provided. The transferee, as I've mentioned, has no obligations in relation to the pre-transfer pension scheme; that remains with the transferor. So, how is a transferee supposed to provide these kinds of benefits absent its own defined benefit pension scheme? There aren't any simple solutions to that, but there are ways that you can protect yourself as a transferee in anticipation of a TUPE transfer.

The first way is by doing due diligence on the pre-transfer pension scheme. Is there a final salary occupational pension scheme on offer before the transfer date for the transferring employees? If so, check for clauses giving right to enhanced pensions payable on redundancy or early retirement, particularly where these are described as early retirement 'for reasons of service efficiency of the employer' or other such wording. If such clauses exist, check whether the pensions payable are unreduced, despite the fact that they are paid before normal retirement age, because that's really flagging that there's going to be an additional liability for you as a transferee.

You may well want to get specialist input if you are looking at a pension scheme and you think these rights exist. Not least because, as a transferee employer, there might be some pretty significant costs associated with providing these pensions, if you are found to be liable under TUPE to provide them. It's worth mentioning that in the Procter & Gamble case the reason that this got taken to the High Court was because the parties were fighting over an estimated liability of £19 million of potential Beckmann liabilities, so it was a really big issue for them to sort out.

As part of your due diligence also check whether there is a consent provision (that control mechanism I was talking about for the employer to agree or decline to pay the redundancy pension) because that can be a really invaluable gatepost to control when the Beckmann rights actually crystallise.

If rights exist, seek indemnity protection in the business transfer or outsourcing agreements. This is essential if you want to get some actual financial compensation from the seller or transferor in respect of the Beckmann rights arising. Valuing these rights might be challenging so you may well need actuarial input on assessing the value of those rights.

It is also possible that you might be able to cut a deal with the affected employees. As I mentioned, we don't have an absolute answer as to how these benefits should be provided by transferee employers. But it is possible, for example, in the context of actual redundancy situation that the Beckmann rights are tied up as part of settlement agreements to compromise out the Beckmann aspects. It's possible to do this because there will be dispute as to the amount of the Beckmann rights that might be a liability of the transferee. You have to be very careful about doing this but I have seen it done in practice, on occasion. What's more difficult is to attempt to compromise out those Beckmann claims where you don't actually have a redundancy situation that you are actually looking at for those employees.

There's also another aspect to consider in terms of the pensions exclusion: don't assume that because there's a pensions exclusion that you don't have to comply with the TUPE consultation obligations. The transferor must inform appropriate representatives in sufficient time to enable consultation under TUPE, and the transferee has obligations to tell the transferor of any measures it plans taking following the TUPE transfer. Any pensions change or measure being proposed should form part of the usual TUPE information or consultation obligations. That would include changes to contribution rates of pension schemes or even administration charges because it has been quite clear in the TUPE case law around measures that very small changes should still form part of the information and consultation process.

Penalties exist for failure to inform and consult. This could be up to 13weeks' pay per affected employee and this is joint and several liability for any failure to inform and consult between the transferor and the transferee. It is also important to understand that there may also be separate pensions consultation obligations and a possible Pensions Regulator fine of up to £50,000 for failure to consult under those pensions consultation regulations.

Moving on, there's also a separate obligation for transferees in relation to the minimum level of pension provision that transferring employers must provide to transferee employees where they were offered occupational pension scheme benefits immediately before the transfer. This was originally put in place in 2005 in recognition of the fact that otherwise transferring employees who had occupational pension scheme rights before a transfer lose those rights in terms of future service benefits at the point of transfer with no obligation on the transferee to offer any kind of pension benefits from that point onwards, subject to the Beckmann rights I've talked about and any public sector obligations.

These protections come from the Pensions Act 2004 and the Transfer of Employment (Pension Protection) Regulations 2005, which I am going to refer to as TEPP. These TEPP pension protections bite where a) there is a TUPE transfer; b) immediately before the transfer the seller or transferor operates an occupational pension scheme, and c) the transferring employee or employees are members of the scheme (either active members or they are prospective members, meaning eligible to join). If it is a money purchase or defined contribution occupational pension scheme, where the employer is required to contribute (so that might be that they have either contractually committed to contribute or it's an automatic enrolment scheme where they are required to contribute) TEPP also bites.

Where the TEPP regulations arise, where people were offered occupational pension scheme benefits before the transfer, the transferee has a choice to provide either defined benefit pensions or defined contribution pensions. It doesn't have to be the same type of benefits as was on offer before the transfer.

Most commonly, a new employer will simply meet this obligation by offering a transferring employee defined contribution or money purchase benefits through an occupational pension scheme or stakeholder scheme from the date of the transfer. In that case, the transferee has an obligation to either match the employee's contributions, up to a maximum of 6% of pensionable pay, or to simply match what the pre-transfer employer was making to the scheme. This has been a new change introduced to TEPP in recognition of the dual obligations of TUPE and automatic enrolment.

Alternatively, the defined benefit option could be put in place. But in my experience, it is very, very unusual now for an employer to offer DB benefits to satisfy TEPP obligations unless it's either already got an open defined benefit arrangement for existing staff or it's got some sort of separate contractual obligation to do so, for example it's a public sector outsourcing.

Unusually in the context of TUPE, which generally prohibits contracting out of its provisions, it is possible for a new employer and the transferring employees to contract out of these TEPP protections and agree something different.

The new automatic enrolment obligations add an additional layer of complexity because the two protections (being the automatic enrolment obligations under the Pensions Act 2008 and the TUPE protections under TEPP) must both be met by the new employer. This means that the due diligence process I have described for establishing what kind of pension provision was on offer to the transferring employees immediately before the transfer remains essential. But the transferee now has the unenviable task of ensuring that both obligations are met. So, at the moment that means that under automatic enrolment, there's a minimum 1% employer contribution and a worker contribution of 1%, but over time that is going to increase to an overall 8% of qualifying earnings for automatic enrolment, which must be complied with alongside those TUPE obligations I have described, so it would be matching up to 6% of the transferring employee's contributions or matching what the transferor was paying before the transfer.

Here is a short case study for me to exemplify this. You might have a transferee employer offering automatic enrolment scheme with minimum contributions to meet its current requirements. There is a transfer of employees into the business. Those employees before the transfer date made 4% contributions to the defined contribution occupational pension scheme. Because an occupational pension scheme was in place, the TEPP requirements must be satisfied by the transferee. The transferee can choose to either match those employee contributions up to 6% of basic pay, so that would be the 4% contributions, or it needs to match the pre-transfer employer contribution. So that might be 4%, it might be less, it might be the 1% that the pre-transfer employer is required to comply with for automatic enrolment purposes, just like the transferee in this example.

What if the transferee wants to make changes to its pension provision for TUPE protected employees and I am primarily thinking about benefits which have transferred under the automatic transfer principle, so for example, personal pension scheme rights or possibly life assurance rights?

Changing TUPE protected transferred pension obligations is problematic. This is the same for many terms and conditions of employment in relation to TUPE transfers. This goes back to the principles established in the Daddy's Dance Hall case, where it was clear that despite employees ostensibly agreeing to terms and conditions changes, those changes could later nonetheless be found to be void for being in connection with a TUPE transfer. So it is very difficult to assume that you can simply change personal pension scheme rights or liabilities following a TUPE transfer as a result of these TUPE protections. A great deal of care needs to be taken on that front.

I have also mentioned possible variations to Beckmann and Martin rights and the possible use of settlement agreements, but again a lot of care needs to be taken and, in my experience, it tends to be in the scenario where redundancy is actually on the cards rather than as part of an overall harmonisation exercise.

So, in summary, I've talked about the importance of due diligence in relation to understanding what the pension liabilities are before the transfer. This is absolutely key; it really helps you as a transferee to understand what your obligations might be following the transfer and to assess what various obligations you might have, be that through legacy defined benefit occupational pension schemes to provide Beckmann or Martin rights, or as a result of the TEPP protections, but also thinking about the other obligations as a result of automatic enrolment and duties found under the Pensions Act 2008. Then you obviously need to think about your options for managing those more problematic obligations.

Siobhan: Thank you very much Liz and just a reminder that if you have any questions on any of those issues or anything else that comes up during the Webinar, please do feel free to ask, we've had a number come in already.

So I'm now going to handover to Jenny, who is going to concentrate on the final tricky issue for today, which is how TUPE applies on a public sector transfer, Jenny.

Jennifer Lewis: Thanks Liz, thanks Siobhan.

Hello everyone, I'm going to spend about 15 minutes today on another one of the tricky TUPE issues, that is TUPE transfers from the public sector. I'm going to cover why TUPE transfers from the public sector are different with regard to pension rights, when you might find you're dealing with a TUPE transfer of public sector staff, the extra protections that apply to those staff, what those extra protections are and what are some of the practical issues you need to keep in mind.

We've heard from Liz that TUPE does not protect the majority of pension benefits and there is uncertainty over what benefits are protected by TUPE. This was an unsatisfactory position for the Government with an agenda to outsource public services. So led to extra protections being put in place to fill the TUPE gap in relation to pensions where staff transferred from the public sector. So, this started with the Fair Deal guidance in '99 and we'll come onto look at the current pension protections that apply where there is a TUPE transfer from the public sector.

It is also important to keep in mind about when you might be dealing with a staff transfer from the public sector. Some scenarios will be obvious, like the first time a public service is outsourced to the private sector or the first time that a service contract is retendered. However, in other situations, it might be less obvious to find that you have historic public sector staff amongst the transferring workforce. For example, the purchase of a business which was historically a function of a local authority. We regularly support on corporate transactions where the due diligence shows up ex public sector employees amongst the transferring workforce where they wouldn't necessarily expect to be found. The entitlements for such staff will then require further investigation but it is important to do that due diligence first, so you know who you are dealing with and what further questions to ask.

This slide shows the extra protections that apply for staff who are compulsorily transferred from the public sector, or did transfer from the public sector and are now the subject of an onward transfer in connection with the provision of the outsourced service. Fair Deal, introduced in '99, was a non-statutory policy that required staff who had been transferred from the public sector to be offered either access to the applicable public service pension scheme, where that was possible, or to be provided with an occupational pension scheme that was broadly comparable to the public sector scheme they had left behind. In relation to their past service benefits, Fair Deal required that staff were offered a transfer of their accrued benefits to the new arrangement on a day for day service credit basis. Many of you may have company occupational pension schemes which are broadly comparable to various public service pension arrangements and provide different benefits in different sections depending on when the staff transferred and what scheme they transferred from.

A New Fair Deal came into effect for transfers after October 2013 and it is also a non-statutory policy and I will come onto to look shortly at who is covered by this and what the requirements of it are. The Best Value Direction of 2007 continues to apply to best value authorities and we'll look later at what might replace this in the future.

So, New Fair Deal applies directly to central Government departments, agencies, the NHS and maintained schools, which includes academies. It also applies to other parts of the public sector under the control of Government Ministers where staff are eligible to be members of a public service pension scheme.

The New Fair Deal guidance does not apply to best value authorities, which includes local authorities, they are covered by the Direction. Fair Deal and New Fair Deal also do not cover TUPE transfers from housing associations, unless there are transferring staff who already have Fair Deal protections as a result of their original transfer from a local authority. New Fair Deal does also not apply to other employers that might be considered to be part of the public sector but it is open to those employers to adopt the New Fair Deal principles. This might apply to certain charitable bodies, for example, whose staff participate in the LGPS.

We'll now move onto to look at what pension protection is required under New Fair Deal. So New Fair Deal applies when staff are transferred from the public sector to an independent contractor. When New Fair Deal applies, that contracting authority should ensure that the contractor provides them with access to the appropriate public service pension scheme for so long as they continue to be employed on the transferred service or function. The contract for service should specifically require this and the contract of employment of the transferred staff should also provide that they have a right to continued membership of the public service pension scheme. This means that the rights are ultimately directly enforceable by the staff. Contracting authorities also need to ensure that staff who have been transferred from the public sector under the New Fair Deal policy are provided with continued access to the relevant public service scheme on any subsequent compulsory transfer while they continue to be employed on the contracted out service, this includes any transfer to a subcontractor. On any subsequent transfer, it is also important that the contract of employment continue to reflect the right of the individual to membership of the public service pension scheme so they can enforce this right against the new employer.

So the previous slide covered the position for staff who transfer under New Fair Deal, however there are many staff who transferred before the New Fair Deal took effect and to whom Old Fair Deal applied. On the re-tender of a contract to which the principles of Old Fair Deal applied, contracting authorities should require the bidders to provide the eligible employees with access to the appropriate public service pension scheme whilst they continue to be employed on the contracted service. This is the default position and the appropriate scheme would normally be the scheme that the staff would have been in if they had remained in the public sector and had not been transferred out. If however there are particular circumstances which mean that to require access to the public service pension scheme would mean that the contracting authority was not treating all bidders equally and therefore was not complying with its procurement obligations, then it may permit the incumbent contractor to have the option of providing a broadly comparable pension scheme. This could potentially be where the costs associated with the bulk transfer are very high or where the employment contracts give employees the right to membership of the broadly comparable scheme and the incumbent contractor is unsuccessful in obtaining consent to vary those contracts. In these exceptional circumstances, the contracting authority may permit all bidders to offer the option of a broadly comparable scheme as well as access back to the public service pension scheme. However, in our experience, these exceptions will be very rare and the default of returning to the public sector scheme will be the normal requirement.

The most complicated element of New Fair Deal is the arrangements for a bulk transfer from an incumbent contractor's broadly comparable scheme back to the appropriate public service pension scheme. New Fair Deal requires that staff moving back have the option of having their accrued rights protected by a bulk transfer arrangement. This will require a transfer payment to be made by the transferor scheme to the receiving scheme. In terms of the mechanism for this, all existing contracts should deal with exit provisions and include an enforceable obligation on the employer to allow for an onward bulk transfer to the new employer's broadly comparable arrangement. It is the standard position for the bulk transfer terms on an outward transfer to be no less favourable than the bulk transfer terms for the original transfer in. If the transfer payment paid out by the trustees of the comparable scheme is less than this, then it is usual under the exit provisions for the employer company to be on the hook for this shortfall.

The contracting authority should have undertaken the necessary preparatory work before issuing the invitation to tender to bidders and should be able to provide details of the onward bulk transfer terms to bidders along with details of the service credits to be provided in the receiving scheme. If the bulk transfer is considered insufficient to meet the liabilities in the receiving scheme, then the bidder is required to identify this price adjustment or shortfall in its bid. The contracting authority will usually be responsible for this shortfall.

If you are dealing with a TUPE transfer of staff from a local authority, then it's the Best Value Staff Transfer Direction that applies. Unlike Fair Deal, this is legally binding and requires pension protection where local authority employees are transferring in connection with the outsourcing of the service. The service contract must provide that the contractor secures pension protection for each transferring employee and that the provision of pension protection is enforceable by the transferring employee. "Pension Protection" will be secured if after the transfer the transferring employee has rights to acquire pension benefits that are the same as, or broadly comparable to, or better than the rights he had, or had the right to require, as an employee of the authority. Pension Protection under the Direction is only required for future service, there is no requirement to provide for a transfer of past service benefits.

The requirement to provide access to the appropriate public service scheme under New Fair Deal is met in the NHS Pension Scheme by the contractor entering into a New Fair Deal direction. This is a standard legal document and provides for eligible employees to be able to access the NHS Pension Scheme.

In the Civil Service Pension Scheme, there is a participation agreement to enter into which sets out the terms by which the contractor would participate in the scheme as a scheme employer.

In relation to the local authority, the requirements of the Direction can be satisfied both through the contractor entering into an admission agreement or by providing or establishing a broadly comparable pension scheme.

It is important to remember that the requirements of New Fair Deal and the Direction are high-level principles only and to be binding on the contractor they need to be imposed through the service contract. If it is not covered in the contract, then there is no requirement on the contractor under New Fair Deal.

The wording of pensions schedules covering the requirements of Fair Deal have been around now, in pretty standard form, for a number of years. In some cases we're finding that standard drafting is being used slavishly without really attention to the specific circumstances of that particular transfer. So, make sure you read the contract and if it does not seem appropriate or doesn't adequately address the requirements, for example the bulk transfer process, then don't be afraid to amend or to challenge the wording.

So, what about the future for transfers from local authorities? Well, the Department for Communities and Local Government revealed its long awaited draft provisions last summer. These were intended to give effect to the New Fair Deal principles within the Local Government sector. It certainly would make sense for the Local Government sector to have the New Fair Deal principles applied to it, rather than the currently different and separate treatment under the Best Value Direction.

The amendment regulations proposed the use of the existing admission agreement mechanisms and introduced a new category of employee called a 'protected transferee'. However in a number of areas the proposals were inconsistent with the requirements of New Fair Deal, for example, the definition of protected transferee was wider and included not just core LGPS employers like local authorities, but also extended protections to employees of existing admission bodies who would not necessarily be covered by New Fair Deal or by the Direction.

The responses to the consultation highlighted these issues and other problems with the detail of the drafting. As a result, DCLG have had to go back to the drawing board. They have not formally responded to the consultation but we understand will instead issue a further consultation. When this will be, however, is another issue as we are informed that DCLG are currently understaffed with resources being directed to Brexit instead.

So, in this final section of the presentation, I will look at some of the practical issues that we see arising in the context of TUPE transfers from the public sector and on the application of New Fair Deal.

Firstly, poor quality data. As Liz has mentioned, obtaining adequate data on the transferring staff is potentially a difficulty connected with all TUPE transfers. However, the potential costs associated with poor quality data could be higher where there are public sector staff transferring and it is really important to make sure that you have all the information as to what scheme the staff are members of as soon as possible in the bidding process. If the information provided by the authority or the incumbent provider is not sufficient, then it is reasonable in a bid to include assumptions and to reserve the position until adequate data is provided.

Redundancy benefits are also a complexity of transfers from the public sector because of the comparatively generous benefits provided by the public service pension schemes. As Liz has described, the rights to redundancy and early retirement benefits will transfer under TUPE and in addition, where there is a transfer from the public sector, there is often specific wording included in the service contract to enshrine this principle so that the contractual position is clear. It is important to make sure that the participation regime for that particular scheme allows access to the public service pension scheme redundancy arrangement. If it does not, then alternative arrangements will need to be made in line with the requirements under the contract. If a broadly comparable scheme is used, then redundancy benefits are outside of the Government Actuaries Department's broadly comparable assessment and so alternative arrangements will also need to be made in that circumstance.

Redundancy rights need to be properly understood and costed, particularly where redundancies are possible after the service transfer. It may be possible to negotiate an indemnity from the contracting authority in respect of such costs. It is also important to make sure that the correct terms are being applied when calculating redundancy benefits and costs. For example, redundancy benefits through the Civil Service Compensation Scheme were amended from November 2016. However, for staff who transferred from the public sector before those changes, the terms of the previous compensation scheme will continue to apply.

Whilst the participation regime has made the process much simpler than the requirement for a broadly comparable scheme, it is still important to make sure that all the associated costs and obligations are understood, for example, the employer contribution rate will be the same for the participating employer as it is for the public sector body. But it is possible that those rates could increase during the term of the contract and you should consider how to deal with that. It is also important to make sure that you understand the further costs that are going to be met by the admitted body. For example, administration charges or costs in respect of commissioned services or additional contributions that will be required where members retire early. As an admitted body, there are also reporting and monitoring requirements and you should make sure that there are adequate systems in place to comply with these. For example, monitoring how much time staff spend delivering the outsourced service to make sure that they continue to be doing it for at least 50% of their contracted hours.

Liz has talked about the interaction between TUPE and automatic enrolment and where there's a transfer of public sector staff then this is equally important because again it could mean additional costs for the new contractor, when staff, who had previously opted out of membership of the public service scheme, are automatically enrolled following the TUPE transfer. It may be possible to put in place mechanisms to provide for an alternative and cheaper automatic enrolment scheme. However, you will need to continue to keep the option of joining the public service pension scheme open if those staff request it and meet the other eligibility criteria.

We've talked already about bulk transfers and they continue to be a particularly tricky area. The significant amount of preparatory work that needs to be done by the authority before it goes out to tender, can be patchy. There is also a significant amount of work to be done by the incumbent contractor and its broadly comparable scheme when preparing for a re-tender. Employers need to make sure they are aware of the shortfalls that may exist if the bulk transfer from the broadly comparable scheme is insufficient.

There has also recently been a new policy note issued by the NHS in relation to bulk transfers and it is possible that these same policy guidelines could be applied to the other public service pension schemes.

Finally, timing continues to be an issue and it is as important as ever to make sure that there is good communication between commercial bid teams, HR teams and the pensions teams in an organisation. The level of engagement and resources from the public service scheme administrators also seems to vary and therefore it is important that they are involved and engaged as early in the process as possible.

That concludes the issues that I am able to cover in the time allowed today. But if there are particular topics in connection with TUPE transfers or transfers from the public sector in particular that you would like to know about, please let us know through the "feedback" tab at the end of the Webinar.

Siobhan: Thank you very much to Jenny for that overview of what is clearly a very complex area.

We are now onto the poll and that will be flashing up on your screen; which is a time for us to ask you what you have experienced in your day-to-day work and what is the trickiest pension's issue which you have faced on a TUPE transfer? So, there are a number of options (a) is it dealing with Beckmann/Martin issues; (b) harmonisation issues; (c) public sector transfer obligations; (d) the interaction between the TUPE protections and the automatic enrolment protections? So if you want to click on which you have found to be the most difficult area; we are getting responses coming in already. And while you are just having a think about that, there's a quick reminder that there is still time to ask a question and we'll be coming onto those straight after the results of the poll. So, just a couple more seconds to let those last clicks come through and we'll push the results out, now.

So, it looks like the largest category - nearly 40% - is the public sector issues one and we did discuss this before and wondered what the outcome was going to be and that was Jenny's bet. But there are a number of you who do find the other areas difficult to deal with as well. So thank you for sharing that and that's an interesting outcome.

We now have time to move on to the questions that have come in.

Liz: I've actually had one in, we've got a number come in…

Siobhan: Okay Liz, yes.

Liz: There's one question about common options that we've seen for a transfer of employees where there are early retirement or redundancy benefits (and we are talking about Beckmann & Martin rights) in a scenario where the transferee doesn't have a link to that deferred pension scheme. It's a really good question. And it goes back to the point that I was making around there isn't really a practical solution provided by the case law or the legislation to help employers understand how to deal with this.

What I've seen done in practice is several different potential options. One of them is to simply reach a settlement agreement with the affected employee, particularly for example if they are being made redundant at the same time. There might be redundancy payments to be made as part of their terms and conditions of employment and the Beckmann aspect might be compromised off as part of that settlement agreement and then the employees might use that money to put it into their own pension pots.

Alternatively, the transferee might want to set up its own separate arrangement - this would have to be a new tax registered scheme - just to provide those Beckmann benefits. You can probably appreciate that is pretty rare in practice because the transferee is very unlikely to want to have the faff, frankly, of having to do that.

The other option it seems to me to be the most reasonable or possible (but again it's still pretty rare) is agreeing with the transferor's scheme to augment the deferred pensions in payment for those affected transferring employees. This is likely to require actuarial input and I would expect that the transferee would be required to fund that additional benefit (being the enhanced element payable on top of the deferred pension). This option has the benefit of making sure the member gets what they are entitled to because it is simply done as an augmentation through the scheme rules. Transferee doesn't have to set up a new scheme. But there will be some funding costs and there would need to be some sort of negotiation or conversation between the transferor, the transferee and the trustees of that scheme to make that happen. So, that's what I've seen in practice.

Jenny, I don't whether there's a question in it that you wanted to answer?

Jennifer: Thanks Liz. There's a question come in about the financial liabilities for a new employer where there has been a transfer of staff from the LGPS and admission agreements are used. It's just important there I think just to explain that the LGPS is a funded scheme, unlike the NHS and the PCSPS which are unfunded arrangements. So, in that situation, there will be a new employer contribution rate worked out for the admitted body based on the staff that are transferring. It is also, in relation to the LGPS, it also important to remember that there is a liability on the admissions body when the contract ends and it ceases to be an admitted body in the LGPS. So that's really the sort of main distinction between the NHS, PCSPS and unfunded arrangements, where the contribution rate is the same as the employer contribution rates for the public sector body. For the LGPS, it will be calculated specifically for that employer and there is an exit liability.

Liz: Thanks Jenny. I've got another one that's come in…I've got a couple actually that'll I'll answer. On question is whether we've seen a distinction being made between Beckmann rights (so those are redundancy rights) and Martin rights (being early enhanced retirement rights) when sellers or transferors are being asked to provide an indemnity? In my experience, there is no one size fits all. This very much depends on what the scheme rules in place before the transfer provide for. If you are trying to cover off a specific Beckmann or Martin right, try and closely echo the wording of the scheme rules as far as possible in question in the indemnity to make sure that you, as transferee, assume as little responsibility as possible, if you can get that agreement from the transferor. So, it's very much going back to that due diligence I was talking about in terms of looking at the specific pensions rule in the trust deed and rules and then tailoring your indemnity accordingly.

There's a separate question that we've had about, a very specific set of circumstances but a scenario somebody's looking at where before the transfer employees were either offered an occupational pension scheme membership or a group stakeholder scheme and I've assumed that the occupational pension scheme on offer before the transfer is defined contribution in nature. But here the transferee already has a non-stakeholder group personal pension. So the question is what's the transferee's obligation following the transfer?

I think the reason why the person has asked this question is, strictly under TEPP, the requirement is that the DC replacement following TUPE is either an occupational money purchase scheme or a stakeholder scheme and that's enshrined in the legislation, but the reference to stakeholder schemes is a bit anachronistic now, as there's no requirement any more to offer a stakeholder pension scheme now that we've got automatic enrolment obligations.

So, my take is that there are two different answers depending on the different tranches of employees you've got.

So you've got people who were offered your occupational pension scheme membership before the transfer, so for those people TEPP protection bites. So you can either offer an occupational pension scheme or you could feasibly offer, I think, a non-stakeholder GPP. The main thing is that you are meeting your overall TEPP requirements. So either making TEPP contributions following the transfer of up to 6% matching the employee's pensionable pay or you've got the choice to make the same contributions as the transferor was making before the transfer. Also adding that of course that you can contract out of those TEPP requirements, for those people who were offered an occupational pension scheme membership before the transfer date.

Alternatively, the person asking the question has mentioned the fact that some employees before the transfer were offered stakeholder membership. In this case, because a stakeholder is a type of group personal pension scheme, this is subject to the usual TUPE transfer principles. My view is that the transferee's non-stakeholder group personal pension is likely to satisfy the requirements, as long as other aspects of the structure of the scheme are the same effectively. So the same contribution rates are payable and ideally the same management charges. In any event, I would recommend that there is information and consultation under the general TUPE principles to make sure that the employees are clear that they are no longer going to be offered a stakeholder membership and that following the transfer it is going to be a non-stakeholder but GPP and everything else is going to look the same.

Siobhan: I think we've run out of time and thank you very much for joining us. Please do fill in the feedback if you have a chance to do that before you sign off. Particularly those who are interested in the public sector point, which was showing as the most 'trickiest' issue on our poll. If you would like to hear more on that, then please do let us know. Finally if there is anything else you would like to hear from Liz or Jenny please do get in touch. Thank you.


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