Pension Rights And TUPE: What Actually Transfers?

Following on from our April 2012 e-bulletin where we examined the Pension Ombudsman's attitude to so called Beckmann liabilities, the High Court has for the first time considered this issue in its recent decision in the Procter & Gamble case1.

Beckmann liabilities refer to rights to early retirement or redundancy benefits which transfer with employees under the Transfer of Undertakings (Protection of Employment) Regulations 2006 ("TUPE").

The General Rule

Rights under or in connection with an occupational pension scheme do not transfer under TUPE. However, this exclusion only applies to pension benefits that relate to 'old age, invalidity or survivors'.

The ECJ held in the Beckmann case2 that redundancy benefits could not be classed as 'old age benefits' because they were not paid at the end of normal working life and therefore fell outside the TUPE restriction (i.e. such rights transferred on a sale). In another case (Martin3), it was decided that early retirement benefits fell outside the pensions restriction where an employee had reached a certain age and early retirement arose by agreement between the employer and employee.

Both these cases and the precedents which they have laid down have significant implications for commercial transactions, with purchasers often negotiating indemnity protection to cover such potential liabilities. However, the precise scope of Beckmann liabilities has until now not been considered by the UK courts.

The Procter & Gamble ("P&G") case

This case considers these issues in the context of a purchase price adjustment to cover potential liabilities.

The case concerned an asset sale of P&G's European tissue towel business. The transaction included a TUPE transfer of 129 P&G employees based in Manchester to a purchaser, Svenska Cellulosa Aktiebolaget ("SCA"). The transferring employees were active members of the defined benefit section of the Procter & Gamble Pension Fund (the "Fund"). The parties knew that certain early retirement rights under the Fund may transfer to SCA. Normally such potential liability is addressed by way of indemnity but in this case a price adjustment mechanism was negotiated. Under this mechanism SCA would benefit from a reduction in the purchase price (calculated using an actuarial formula) to reflect any liabilities and benefits accrued under the Fund before the transfer to it under TUPE – i.e. any accrued Beckmann liabilities.

The parties view of the adjustment varied significantly –...