When exactly does TUPE apply?

TUPE will apply where:

• there is a relevant transfer (i.e. either a transfer of business, undertaking or part of a business where there is a transfer of an economic entity that retains its identity such as a business sale, or where there is a ‘service provision change’ i.e. an outsourcing of activity to a contractor);
• by virtue of that relevant transfer, an employee ceases to be employed by the seller (i.e. the transferring employer) and becomes employed by the purchaser (i.e. the new employer); and
• immediately before the relevant transfer, the employee was an active member of the transferring employer’s occupational pension scheme or, if not a member, was eligible to join the transferring employer’s occupational pension scheme (or in a probationary period waiting to become eligible).

What happens from an employment perspective?

TUPE seeks to protect employees’ employment rights so, if TUPE applies, contractual employment rights transfer to the purchaser in its capacity as the new employer. 

What happens from a pensions perspective?

Rights under occupational pension schemes and personal pension schemes are treated differently under TUPE. 

Occupational pension schemes

Most rights under occupational pension schemes do not transfer under TUPE.  This is known as the pension exemption.

However, some rights under an occupational pension scheme which do not relate to benefits for old age, invalidity or survivors (e.g. enhanced redundancy and advantageous early retirement terms) are excluded from the pension exemption and could therefore pass to the new employer under TUPE.

Personal pension schemes

Personal or stakeholder pension rights under contracts of employment will transfer under TUPE.

(For completeness, it is worth noting that death benefit only schemes (i.e. death in service benefits not provided under an occupational pension scheme) will also transfer under TUPE.)

Pension protections

There are limited pension protections requiring new employers to provide minimum pension benefits for certain transferring employees on the transfer of employment.

These pension protections apply in addition to the new employer’s automatic enrolment duties.

What are the minimum benefits that employers must provide if the pension protections apply?

If the transferring employer has an occupational pension scheme which the transferring employee is a member of (or eligible to join) and the transferring employer is required to, or chooses to, pay contributions to the scheme (regardless of whether the scheme is a defined contribution or defined benefit scheme), the new employer has to offer the transferring employees membership of an occupational pension scheme (which can be a defined contribution or defined benefit scheme). 

New defined contribution occupational pension scheme

If the new employer is going to offer membership to a defined contribution pension scheme, it typically has to pay employer contributions which match employee contributions up to a maximum of 6% of basic pay or, if the transferring employer is required to make contributions solely for the purpose of producing money purchase benefits immediately before the transfer, the new employer may pay contributions which match the employer contributions which are made by the transferring employer.

New defined benefit occupational pension scheme

If the new employer is going to offer membership to a defined benefit pension scheme, certain minimum quality standards need to be met. For example, members could broadly be entitled to benefits, the value of which equals or exceeds 6% of pensionable pay for each year of employment together with the total amount of any contributions made by them.  If the member is required to contribute to the pension scheme, their contributions cannot exceed 6% of their pensionable pay.

New personal pension scheme

If the transferring employer provides access to a personal pension plan to which it contributes in respect of the transferring employees as required under their contracts of employment, the new employer will have to pay the same employer contributions in respect of the transferring employees.

Consultation

Under TUPE, there are certain obligations to inform and consult with representatives of affected employees and this can include information relating to the legal, economic and social implications of the transfer, which can include changes relating to any pension arrangements, whether transferred or not.