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Tupe or not Tupe? Two cases in the European Court of Justice concerning transfers and early retirement suggest that trouble may be ahead for firms that have been involved in takeovers, warns Sue Nickson.

Regulation 7 of the Transfer of Undertakings (Protection of Employment) Regulations 1981 (Tupe) provides an exemption from transfer in respect of provisions for old age, invalidity and survivors' benefits under occupational pension schemes. Its definition of "old-age benefits" has been a key issue in two ECJ cases.

Both concerned the transferability of arrangements for an enhanced pension to be paid upon the redundancy or dismissal through similar circumstances of scheme members who had reached a certain age. They referred to long-term benefit arrangements in the NHS that gave enhanced early-retirement pensions to over-50s leaving service in those circumstances. Previously, such arrangements were thought to be covered by the regulation 7 exemption and so weren't transferable under Tupe, but the ECJ's rulings have reversed this view.

In Beckmann it held that early-retirement benefits paid on redundancy to those under the normal retirement age aren't old-age benefits under the exemption. This is the ease even if those benefits are calculated by reference to scheme rules for deriving normal pension benefits. Only those benefits paid to scheme members who on retiring have reached the normal retirement age will be considered old-age benefits under Tupe.

The ECJ also applied this logic in Martin. It found there was no reason to treat pension benefits granted on early retirement by agreement with the employer any differently from those applicable upon redundancy--ie, a contractual redundancy payment scheme. Accordingly, such benefits would transfer under Tupe in each case.

Doubts remain over whether all early-retirement terms after Martin are now separate from old-age benefits (and so transfer under Tupe), or whether it's merely those that are enhanced in certain circumstances. The ECJ indicated that pension benefits payable upon early retirement "agreed between the employer and employee" need not be distinguished from those triggered by redundancy, but did it really intend to include all early-retirement benefits as transferring under Tupe? If it did, this could be a costly ruling for many employers.

The impact of the ECJ's rulings on this issue means that employees who previously benefited from enhanced pension provisions of this sort but lost it in a Tupe transfer may now try to claim that the new employer has been failing to provide benefits that, it now appears, should have transferred automatically under Tupe. This applies both to current employees and to those who in the past six years have left their employment in circumstances that would previously have triggered the enhanced benefits.

Although this may be a scary prospect, in practice the risks to private-sector employers are probably restricted mainly to transfers in of individuals who were formerly employed in public services, because public-sector organisations are the most likely employers to have had such terms included in their pension arrangements. There is obviously little risk arising from Beckmann and Martin, where past transfers in have featured only people on defined-contribution pension arrangements. Acquisitions by way of share sale rather than Tupe transfer also remain unaffected.

Employers concerned about their possible exposure may want to investigate this area further as part of their risk management process. Looking forward, potential acquirers may also want to increase the degree of due diligence applied to the pensions aspect of a target's benefits arrangements (especially where the transferor or any of its predecessors have been in the public sector). Does the scheme contain enhanced early-retirement provisions? What do they say? Has anyone claimed under them? Has anyone left in the past six years who could make a claim? It would be wise to seek suitable indemnities from the transferor against the possibility that these particular chickens could come home to roost.

Sue Nickson is head of the Natinal Employment Law Unit at Hammond Suddards Edge
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Title Annotation:Legal
Author:Nickson, Sue
Publication:Financial Management (UK)
Geographic Code:4EUUK
Date:May 1, 2004
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