Pensions Update: High Court limits scope of Beckmann liability

In brief

In an important judgment last week the High Court clarified the extent to which the obligation to provide redundancy or early retirement pension benefits transfers to the buyer of a business.  The ruling confirms that, where the obligation is triggered, the buyer must provide benefits only up to the date a former employee reaches his normal retirement date under the seller's scheme.  Also, the buyer need only provide the enhancement the employee would have been entitled to under the seller's scheme, not the full amount of the pension plus the enhancement.

These potential liabilities are a regular source of difficulty in negotiating the terms of business sales and the same principles apply in outsourcings, changes in service provider and some franchise-operator changes.  The judgment helps clarify the potential obligations at issue and identifies them as more limited than had been feared, and therefore less of a cost risk for buyers, service providers and other new employers.

The judgment is likely to be appealed.

In more detail

On the sale of a business (rather than of shares) the Transfer of Undertakings (Protection of Employment) Regulations (TUPE) operate to transfer the terms of the contracts of employment of workers employed in the business to the buyer.  Terms relating to occupational pension schemes (not personal pension schemes) do not transfer to the buyer or service provider.

In 2002, in a case involving a UK public sector worker, Katina Beckmann, the European Court of Justice confirmed that early retirement benefits payable under an occupational pension scheme on redundancy were not carved out of the transfer of contractual terms by this exclusion and so did transfer to the buyer under TUPE.  This is because TUPE restricts the occupational scheme exclusion to scheme benefits that relate to old age, invalidity or survivors' benefits. The ECJ held that the redundancy benefits in question were not "old age" benefits because the employee had not reached her normal retirement date.  A later case confirmed that, in some circumstances, early retirement benefits were not carved out either and so did transfer.  Since then, the benefits which transfer have been known as Beckmann benefits.

These two cases raised more questions than they answered because the ECJ did not make clear what it meant by redundancy or early retirement benefits.  On a worst case scenario, it could have been that the buyer was required to provide the same benefits on redundancy or early retirement that the employees would have been entitled to had they been able to remain members of the seller's scheme, calculated to take account of service with the seller and the buyer, and any enhancement to the benefits awarded on redundancy or early retirement and through the whole of their retirement to death.

The cost of providing such benefits is potentially significant and has led to buyers seeking price reductions, retentions or indemnities from sellers to protect themselves against the risk.

The High Court's ruling last week in The Proctor & Gamble Company v Svenska Cellulosa Aktiebolaget SCA and another was the first to look at the detail of the benefits that transfer.

The Court decided that the only obligations that transfer to the buyer are obligations to provide enhancements to accrued benefits (on redundancy or early retirement) which are not available to the employee because he has ceased to be an active member of the seller's scheme.  The enhancements could take the form of, for example, the application of favourable actuarial reduction factors for early payment of the pension, added years of pensionable service on redundancy or the payment of temporary bridging pensions between the date of early retirement and state pension age (when the basic state pension becomes payable).  The obligation to provide the core accrued benefit (ie the deferred pension which the transferring employee is entitled to under the seller's scheme) therefore does not transfer.  This avoids the employee enjoying the windfall of being able to claim his deferred pension from the buyer as well as from the seller's scheme.

Also, the Court held that where an employee is made redundant or retires early, the buyer only has to provide the enhancement up to the former employee's normal retirement date under the seller's scheme.  Subsequent payments should not be regarded as early retirement pension just because the pension started before the employee's normal retirement date.  Instalments paid after normal retirement date should be treated as in respect of old age, and are therefore excluded from the benefits that transfer under TUPE, where a pension is payable for life.

Where the enhancement is payable under the seller's scheme only with the consent of the relevant employer, the discretion transfers under TUPE so that  the buyer need provide the enhancement only if it decides (acting in good faith) to give its consent.

These clarifications reduce the scope of the pension obligations which, it was feared, might transfer under TUPE. They also provide welcome clarity on a number of questions raised by the Beckmann case.  However, because of the particular facts of the case, the Court was not required to give a ruling on all aspects of the Beckmann issue.  Uncertainty remains over, for example:

• Whether the enhancements that transfer under TUPE include revaluation of accrued pension by reference to future salary increases of the employees concerned (which would have increased their accrued pensions if they had remained employees of the seller).  Linkage to salary will usually result in a greater increase than the statutory revaluation applied to deferred pensions when an employee ceases to be a member of a scheme.

• Whether the enhancements include the pension that the employees would have built up in the seller's scheme had they remained employed by the seller for the period they were in fact employed by the buyer.

• If the pension payable after an employee's normal retirement date is greater as a result of the enhancements than it would have been, whether the buyer is liable for this additional amount, even though it is not liable for the balance of the pension payable after normal retirement date.

The Court's decision is helpful, but it is not the last word on the Beckmann issue – particularly as it is likely to be appealed.

For further information or tailored advice please contact your usual Fieldfisher adviser or one of our pensions partners, Michael Calvert or David Gallagher.