Between April 2005 and April 2014, where employees transferred to a new employer (the Transferor Employer) under TUPE and they were entitled to occupational pension scheme benefits, the new employer (the Transferee Employer) was required to provide certain minimum pension benefits going forward.
Broadly, the Transferee Employer was required to provide one of the following pension arrangements, for the transferring employees:
- a defined benefit scheme which meets certain prescribed requirements;
- a defined contribution occupational scheme or a stakeholder scheme to which the Transferee Employer must match the employee’s contributions up to 6% of basic pay.
Impact of auto-enrolment
However, since the auto-enrolment regime was introduced (requiring employer contributions of 1% rising to 3% from October 2018), concerns were raised that the 6% minimum employer contribution to a DC arrangement could lead to a two tier workforce, with employees who have been transferred-in following a TUPE transfer receiving more generous contributions from their employer (adding to the employers’ costs) than the rest of the workforce.
The DWP consulted on this issue in February 2013. The upshot is that amending regulations came into effect on 6 April 2014 (applicable to TUPE transfers on and after this date) which adds a further option. Basically, where a Transferor Employer was required to make contributions solely for the purpose of providing money purchase benefits, the Transferee Employer may provide, as a minimum, the same level of contributions as the Transferor Employer for the employees immediately before the transfer took place.
This additional option introduced by the new regulations is very useful in that it ensures that a two tier workforce will not inadvertently be created following a TUPE transfer. It also allows Transferee Employers to achieve the costs savings generated by not automatically having to provide the more generous level of contributions to a DC arrangement (i.e. minimum of 6%).
The current position could however still lead to contribution reductions for those transferring employees who enjoyed Transferor Employer contributions in excess of 6%. For example if the Transferor Employer contributed at 10% matched contributions, the Transferee Employer would only have to contribute at 6%. This position can contrasted to those transferring employees who enjoy membership of a contract based scheme and whose contribution entitlements are hard-coded into their contracts of employment – in this instance, the pension contribution rights will transfer under TUPE so that a Transferee Employer would be required to maintain the existing level of contribution (in the above example, the 10% matching right would continue). The risk of a two tier workforce following a TUPE transfer is not altogether eliminated!
The DWP has also clarified that that the transferring employees can choose the level of contributions they make where the employer has chosen to meet its statutory obligations by providing a DC arrangement with matching transferee employee contributions up to 6%. This clarification is important in that it prevents Transferee Employers engineering a situation whereby it imposes a minimum level of employee contribution when they join the new scheme. Transferring employees should be able to decide the contributions they wish to make and the regulations will be interpreted in line with this intention.