Pension Provision following business transfers The Transfer of Undertakings (Protection of Employment) Regulations 1981 (TUPE) apply when a business, or part of it passes from one owner to another. TUPE preserves the contractual terms of those whose employment transfers in such circumstances. However, the future provision of old age, invalidity and survivors’ benefits as provided by occupational pension schemes is excluded from the scope of TUPE’s protection. The DTI is in the process of reworking the main TUPE legislation. It is expected that the revised Regulations will be laid before Parliament in Autumn 2005, and come into effect on 6 April 2006. Pensions Protection under the New Rules The Transfer of Employment (Pensions Protection) Regulations 2005 came into force with effect from 6 April 2005 and effectively extend TUPE protection to occupational pension benefits. Employees with access to an occupational pension scheme immediately before a TUPE-applicable business transaction must have access to employer-sponsored pension arrangements after the transfer (it becomes a condition of the employee’s contract of employment with the new employer). The protection applies only if, pre-transfer: - (for all occupational schemes) the employee was, or was eligible to be, an active member of the ‘old’ employer’s scheme, or would have become eligible had he served the usual waiting period; - (where any of the benefits were money purchase benefits), the old employer was required – or would have been required had the employee become an active member - to contribute on the employee’s behalf; or, if the employee is an active member, has in practice paid such contributions in the past, even though it was not required. If the above conditions are satisfied, and unless the new employer and employee agree otherwise, the transferring employee’s contract of employment with the new employer will be required to make provisions for the employee to have access from the date of transfer of employment to either a defined benefits or money purchase scheme which, as a minimum, is of a certain standard (described below). For those not eligible for membership of the old employer’s scheme, membership and employer contributions under the new employer’s scheme do not need to begin until the time when the employee would have been able to join the old scheme. Money Purchase If the new employer decides to provide the transferred employees with a money purchase scheme or a stakeholder scheme (either an occupational pension scheme or a stakeholder scheme) then the employer must pay relevant contributions (see below) to the scheme. Defined Benefits If the new employer elects to grant the transferred employees membership of a defined benefits scheme (or any type of scheme other than a purely money-purchase scheme) then the scheme must either: - Satisfy the reference scheme test; or - Entitle members to benefits worth at least six per cent of pensionable pay per annum, plus the value of the employees own contributions (and in this case, employees cannot be required to contribute in excess of six per cent of pensionable pay per annum); or - Require that the new employer makes relevant contributions to the scheme. Relevant Contributions Relevant contributions are defined in the Pensions Protection Regulations as; - Employer contributions which are made in respect of each period for which the employee is paid remuneration, provided that the employee also contributes to the scheme in respect of that period; where - The amount of the contribution in each period is at least equal to the amount of the member contribution in that period; up to a maximum of six per cent of basic pay. The minimum amount of the relevant contributions excludes contracted-out ‘minimum payments’ for schemes which are contracted-out of the state additional pension. The new rules apply to the purchasing employer where a business transfer subject to TUPE takes place on or after 6 April 2005. It will be possible for the employees and the new employer to agree to opt out of these provisions. The new provisions will not in practice apply in relation to public sector transfers where the existing “broadly comparable” requirements will continue to be effective. Section 101 of the Local Government Act 2003 enshrines in legislation the requirement that Best Value Authorities must deal with matters relating to transfers of staff as a result of a contracting out exercise, and their terms and conditions of employment, in accordance with directions and having regard to guidance issued by relevant Ministers. Also covered is the situation in which a Best Value contract ceases and the services concerned again become the responsibility of the local authority. Section 102 of the Act provides that Ministers, when exercising their powers to give directions unsers.101, do so in a way that obliges Local Authorities to ensure that rights to future pension accrual are protected for staff transferred to a private sector contractor, and that the employees will have an enforceable right against the contractor in this regard. The requirement to secure ‘pension protection’ is met if the transferred staff have rights to acquire benefits that are the same as, ‘broadly comparable’ to or better than those they had as employees of the local authority. The section also covers the situation in which a best value contract is later re-evaluated and awarded to a new contractor; the pension rights of any original employees transferred as a result are to be similarly protected. In March 2003 the ODPM formalised a Code of Practice on Workforce Matters in Local Authority Service Contracts. The guidance was effective immediately for new contracting out exercises and applies the principles of the Cabinet Office’s January 2000 Statement of Practice on Staff Transfers in the Public Sector. Employees in the wider public sector have their occupational pension provision protected to some degree following a business transfer within the guidelines set out in Annex A of the Cabinet Office Statement of Practice. The Pensions Act 2004 provides the legislative protection for the private sector and will underpin the wider public sector good practice guidance where necessary.
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