Pension benefits: Retiring types

Pensions auto-enrolment

From October 2012 onwards, all UK employers have been required to auto-enrol their “eligible jobholders” into a pension arrangement and pay contributions on their behalf.

Your “staging date” for auto-enrolment will depend on the headcount within your organisation as of October 2012 and will be a designated date between now and 2017. However, even if you do not need to auto-enrol your jobholders for some time, there are a number of steps which you can usefully be taking at this point:

• You should start to review your existing workforce to be clear on who will be classed as a “jobholder” for the purposes of auto-enrolment. Importantly, staff such as temporary and fixed-term contractors and even agency workers may, (provided they meet certain age and earnings thresholds) fall within the definition of a “jobholder” meaning that the obligation to provide pensions will be far wider than at present.You will also be required to enrol jobholders who are “ordinarily working in the UK” - which could include foreign nationals, as well as UK employees who are based overseas.
• You should also consider which pension vehicle you will use to auto-enrol your jobholders and, if necessary, review your existing pension arrangements to assess their suitability as a qualifying pension arrangement. Although employers will be able to use their current pension arrangements to auto-enrol jobholders, any existing scheme that is used will need to meet certain quality criteria - particularly as regards the level of contributions payable. Alternatively, you will be able to use the National Employment Savings Trust (NEST) - a government scheme set up to help employers comply with the auto-enrolment requirements.
• From a financial perspective, auto-enrolment will amount to a 3% hit on your payroll. You should therefore start to plan now to manage these additional costs and factor the cost of auto-enrolment into your budgetary forecasts for 2013 onwards.

Pensions and TUPE

Although pension benefits are excluded from the scope of a Transfer of Undertakings (Protection of Employment) (TUPE) transfer, certain pension rights under occupational pension schemes (essentially early retirement and redundancy) do transfer with staff to a new employer.

However, the pension arrangements in those cases were public sector schemes, and it has always been unclear if, and how, the principle might apply in the private sector. As a result, where an employer is involved in an outsourcing exercise or other TUPE transfer and there is a defined benefit pension scheme in place, the question of how to deal with pension liabilities would be heavily negotiated - with the buyer typically seeking indemnity protections against costs it might incur.

The High Court in the recent decision of Proctor & Gamble vs SCA has added some demarcation to how these pension liabilities should be assessed. The court held that where there are early retirement/redundancy rights in play and these rights transfer:

• The buyer assumes liability only for enhancements to an early retirement pension that is no longer available following the TUPE transfer, and not for the full amount. This is important because it means transferring employees are not able to make a double recovery by claiming their deferred pension and then look to claim entitlement to a full early retirement pension from the new employer.
• If the rules of a pension scheme provide for early retirement to be available subject to the consent of the employer, then an employee’s right to be considered for early retirement benefits in good faith also transfers to the buyer under TUPE. This means that although the buyer will need to consider whether to grant early retirement, it may be able to withhold consent provided that it can show its decision is not irrational or perverse.

This is a welcome decision from the courts, but it also throws up additional questions: what happens if the employee has drawn their deferred pension by the time they look to draw their early retirement benefits? Does the new employer have to replicate early retirement benefits for future service, and how can the new employer fund any early retirement costs which do transfer if it does not have a pension scheme itself?

We understand an appeal may be heard, which will go some way to resolving these points. For now, due diligence will need to be undertaken to determine what early retirement rights are payable in any particular case.

Andrew Campbell is an associate at Olswang