Changes
to pensions - an occupational hazard?
The law
on pensions and similar employee benefits is going through change:
employers need to be aware of changes which have already happened,
and others which are on the way.
TUPE:
recent cases
Recently
there have been two major European cases on the application
of the Transfer of Undertakings (Protection of Employment) Regulations
1981, as amended, (TUPE) to various benefits payable under pension
schemes. Whilst the two cases, Beckmann and Martin, concern
public sector pension schemes, the decisions may also apply
to a number of benefits under private sector schemes. As such,
all employers are advised to follow developments in this area.
TUPE is
the UK implementation of the European legislation, the Acquired
Rights Directive (ARD) and must be interpreted consistently
with it. It provides that when a business or similar operation
is transferred from one organisation (the transferor) to another
(the transferee), the employment and contractual rights of the
transferring employees are protected and the rights and obligations
of the transferor are inherited by the transferee.
Rights in
occupational pension schemes are, however, an exception to the
rule that rights transfer under TUPE. Until recently, the basic
position in the UK has been to assume that any right to ongoing
membership of an occupational pension scheme is unprotected
by TUPE. In
the above cases, the European Court of Justice (ECJ) ruled that
this exception is strictly limited to those benefits payable
for old age, invalidity or survivors’ benefits, and ‘old
age’ is limited to when an employee reaches the end of
their normal working life. In Beckmann it held that redundancy
pensions transferred with employees to the transferee and in
Martin that early retirement benefits transferred. The ECJ logic
would also seem to apply to most pensions benefits payable on
severance or voluntary early retirement. Other test cases on
specific benefits may now be brought.
One of the
implications of these cases is that employees who transferred
years ago may benefit from the limitation, provided that they
remain within the business
that was transferred.
Any employer
that has taken on staff under a TUPE transfer should check their
pension arrangements. There is a strong risk that generous employee
benefits have
transferred. This has to be confirmed if any such employees
are candidates for early retirement, severance or redundancy.
The risk is particularly acute where the transferor was a public
sector body with a generous pension scheme.
TUPE:
proposed legislation
The Government
has announced a wide-ranging set of pensions law reforms, most
of which are in the Pensions Bill 2004. These may also impact
on occupational pensions as reform of TUPE to include occupational
pensions has, after prolonged consultation, finally been included.
Personal pensions, such as group personal pensions and most
stakeholder schemes, already transfer under TUPE.
If Parliament
approves the Pensions Bill, then the transferee of a business
where the transaction was within TUPE will have to maintain
a limited level of pension provision for the transferring employees
where the employees were in an occupational pension scheme before
the transfer (note that this is in addition to those rights
which do already transfer under the logic applied in Beckmann
and Martin).
If employees
are in a final salary, or similar, scheme the transferee will
have a choice of what to offer. It can offer a final salary
scheme that is good enough to be contracted out of the State
Second Pension, or it can offer a money purchase arrangement
with an employer contribution rate of 6% of salary available.
The money purchase arrangement can be an employer-sponsored
scheme or a stakeholder arrangement.
If the transferor
provided a money purchase scheme the transferee must match it
up to a maximum of 6% employer contributions. Alternatively,
it can offer a final salary, or similar, scheme if it is good
enough to be contracted out of the State Second Pension. If
employees are in different pension schemes or sections then
each group must be treated separately. Failure to comply will
mean that the transferee is in breach of the employees’
contracts of employment.
These changes
to TUPE are projected to take effect in April 2005 although
this date is not fixed. Most of the rest of the Pensions Bill
reforms affect employers with defined benefit schemes (often
called ‘final salary schemes’) including closed schemes.
The law
on pensions and similar employee benefits is going through change:
employers need to be aware of changes which have already happened,
and others which are on the way.
Changes
to UK tax law
In December
2003, the UK Treasury and Inland Revenue published the long-awaited
consultation paper Simplifying the Taxation of Pensions –
the Government’s Proposals.
This, together
with an earlier consultation paper, heralds radical reforms.
Current UK tax law on the treatment of personal and occupational
pension schemes is complex,
with eight different and inconsistent regimes governing the
same basic concept – retirement income. These will be replaced
by one new simplified regime based on an
individual lifetime pension saving allowance. Many of the proposed
changes are now in the Finance Bill 2004.
In his recent
budget, the Chancellor confirmed that the lifetime limit will
start at £1.5 million in April 2006. The National
Audit Office has calculated that only 10,000 people will be
caught by the new total allowance.
Other basic
rules in the new regime are: retirement will be allowed at 55
years of age at the earliest (currently it is 50, with special
rules for certain occupations); people can build up pension
whether or not employed; there will be no limit on the number
of schemes anyone can contribute to at once; and pension tax
rules will be checked through an individual’s self-assessment
returns rather than an employer’s pension administration.
In their
drive for simplicity, the Treasury and Inland Revenue have minimised
provision for special cases. So employees who currently benefit
from many of the Inland Revenue’s special rules are among
those who require specific attention from the employer. In preparing
for the new regime, employers need to look at anyone paid over
£102,000 a year, employees with agreed retirement ages
younger than 55, UK-domiciled employees who are temporarily
transferred abroad and employees in a scheme established outside
the UK with ‘corresponding approval’.
The Inland
Revenue plans to publish more details this summer on how special
cases will be treated under the new regime. If the employer
has specifically designed
benefit plans to achieve a desired effect, it may be under a
duty to review and, if necessary, revise those plans.
Further
advice on these issues and any other pensionslaw questions can
be provided by our specialist pensions teams.
For
further details visit www.ffw.com
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