Regulation 10 of the Transfer of Undertakings (Protection of Employment) Regulations 2006 (TUPE) states that pensions are excluded from the remit of the legislation. In The Proctor & Gamble Company v SCA Hygiene Products, the High Court said, however, that following several European decisions, discretionary early retirement benefits were transferrable.
Procter & Gamble, which offered staff a defined benefit scheme providing early retirement benefits (ERBs), sold its Family Care business to SCA in 2007. Over 100 employees transferring to SCA were members of the scheme.
It was accepted by both parties that TUPE applied (which meant that all the “rights and obligations” under the employees’ contracts transferred over), but SCA made clear it did not want to take on any of the company’s pension liabilities.
Although Regulation 10(2) of TUPE states that "old age, invalidity or survivors” pension benefits do not transfer, the Court of Justice of the European Union (CJEU) decided in two cases - Beckmann v Dynamco Ltd and Martin and ors v South Bank University - that enhanced benefits payable on redundancy and early retirement were not 'old age' benefits and therefore did transfer.
The companies agreed in the Sale and Purchase Agreement that P&G would reduce the purchase price accordingly. However, a dispute then arose as to the extent of SCA’s liabilities if they did transfer over and how much the reduction should be.
High Court decision
The High Court identified three questions:
1. Did the transferring employees have rights and did the transferring company have obligations which transferred over under TUPE?
The CJEU case of Martin established that just because an entitlement was discretionary, and could be varied or even terminated unilaterally by the employer, did not mean it was not covered by TUPE.
The High Court said therefore in this case that, although the entitlement of the transferring employees was discretionary, the phrase "rights and obligations" (which were wider than contractual liabilities) in TUPE should be liberally interpreted without regard to domestic distinctions between a discretionary entitlement and a legally enforceable right. The entitlement of the transferring employees (and the company’s concomitant obligations) therefore transferred over.
It said this conclusion was consistent with the objective of TUPE - to safeguard the interests of transferring employees by vesting the discretionary power to provide ERBs in the entity that employs them.
2. Did liability for all ERBs or only liability in respect of the enhancements transfer under TUPE?
Referred to as the 'windfall' or 'smiling pensioner' point, the judge said that, as the transferring employees had the right to a deferred pension from P&G they would benefit twice if they could also claim from SCA. This would give a windfall to a pensioner which "might well occasion him or her to smile".
As the objective of TUPE was to protect employment rights, not to confer additional rights on employees, only the rights to be considered for the enhancements transferred over .
3. What was the scope of Regulation 10(2) of TUPE and the meaning of "old age benefit"?
The judge said that the real question here was whether benefits first triggered as ERBs still had to be treated as such for ever, even after the normal retirement age (NRA) had passed and never as old age benefits.
He concluded that such a rule would be “counter-intuitive” as pension instalments paid after the NRA were still old-age benefits, even though they were first paid before the person’s NRA.
There was nothing in the decisions of Beckmann or Martin, which suggested that “a pension being paid to a 100-year old is not an old-age benefit simply because by consent of the employer it initiated at 64 and not 65”. The fact that these decisions related to public sector schemes also made no difference.
The orginal Beckmann case was a major test case victory for UNISON. Its core principles remain untouched and can be relied upon in the public and private sectors. The catch seems to be that the extent of the recoverable benefits is limited to pension payments before NRA. It can be argued forcefully that the fact of early retirement (particularly on redundancy) is compensated for by added years of pension, and the value of those compensatory added years should continue to be paid after NRA.