Summary
The case, in the High Court, of Procter & Gamble (P&G) v Svenska Cellulosa Aktiebolaget SCA (SCA) tested the extent to which early retirement benefits may be considered “old-age benefits” and, as such, exempt from the Transfer of Undertakings (Protection of Employment) Regulations 2006 (TUPE).
The Court determined that an early retirement benefit can indeed be an “old-age benefit” – to the extent that pension instalments are paid after normal retirement age – but that instalments paid prior to that date should not be considered to be old-age benefits. The liability to pay those earlier instalments does therefore pass to the transferee under the provisions of TUPE.
The Background
TUPE applies on the transfer of a business to a new owner and acts to protect the terms and conditions of employment of the employees who transfer with the business. Those terms and conditions transfer to the new employer, so that the employees are treated as if they had continuous service with that new employer.
TUPE was first adopted in 1981, to implement in UK legislation the EU Acquired Rights Directive 1977. Since that Directive provided that employees’ rights to benefits for “old age, invalidity or survivors” under the seller’s pension schemes do not transfer to the new owner it has long been understood that pension rights do not transfer under TUPE but remain with the seller.
The Beckmann and Martin cases, heard in 2002 and 2003, respectively, tested whether enhanced pension benefits on redundancy qualified as “old-age benefits”. In those cases the European Court of Justice (ECJ) concluded that such benefits were not “old age benefits” – because they were not paid at the end of the member’s normal working life – so liability for themtransferred to the new owner of the business. It has subsequently become common for purchasers of businesses to seek a “Beckmann indemnity” from the seller, protecting them from liabilities arising from claims for lost pension rights following a business transfer.
When P&G sold its tissue towel business to SCA in 2007, SCA refused a Beckmann indemnity. Instead the sale and purchase agreement provided that SCA would assume liability for an accrued pension rights that transferred to it and that the purchase price would be reduced accordingly.
The P&G pension scheme had a normal retirement age of 65. Early retirement required employer consent and the benefits then payable were reduced to reflect their early payment. The extent of reduction varied, according to whether or not a member had completed 15 years’ service.
The High Court decided that, while the transferring employees had no contractual right to early retirement (since such retirement required employer consent), they did have the right to expect that a request for early retirement would be considered fairly by their employer and this right transferred under TUPE to SCA as purchaser.
The Court determined that the liability transferring under TUPE should be restricted to the liability for the rights that would otherwise be lost by transferring employees:
- the right to be considered for early retirement and
- the ability for employees with less than 15 years’ service to eventually become entitled to the lesser actuarial reduction which applied on achieving 15 years’ service.
The Court went on to consider whether early retirement benefits must be treated as such even after normal retirement age and concluded that early retirement benefits could be “old-age benefits” so long as they continued to be paid from the same scheme after normal retirement age. The only part of the early retirement benefit which was not an “old-age benefit” was the pension paid between the date of the member’s early retirement and his normal retirement age and the liability for that part of the pension transferred, therefore, under TUPE.
It is expected that the case will be appealed.
Comment
Much of the debate in this case revolved around the need to put a value on the pension rights that might transfer under TUPE, in order that P&G and SCA could agree an appropriate adjustment to the purchase price for the business. Had SCA accepted a Beckmann indemnity, no valuation would have been necessary and the case might not have arisen. Future buyers may, therefore, prefer to follow the route of seeking an indemnity.