Pensions. Briefing. Summary. May 2012

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1 Pensions FINANCIAL INSTITUTIONS ENERGY INFRASTRUCTURE, MINING AND COMMODITIES TRANSPORT TECHNOLOGY AND INNOVATION PHARMACEUTICALS AND LIFE SCIENCES Briefing May 2012 High Court considers scope of transferring pension liabilities on a business sale: The Procter & Gamble Company v Svenska Cellulosa Aktiebolaget SCA and Another [2012] EWHC 1257 Summary In this case, the High Court considered the treatment of what are known as Beckmann liabilities on an asset sale under the Transfer of Undertakings (Protection of Employment) Regulations 2006 (TUPE). The Court concluded that: the rights of the transferring members and the obligations of Procter & Gamble (P&G) as the transferring company transferred to Svenska Cellulosa Aktiebolaget SCA (SCA) as the purchasing company following the transfer, SCA assumed liability only for those pension entitlements which were no longer available to the transferring employees following the TUPE transfer. The transferring members became deferred members in the P&G scheme after the sale, and therefore could not claim for a full early retirement pension from SCA too, as this would have been a double recovery and liability for an early retirement benefit can be an old age benefit and therefore does not pass under TUPE. This liability includes pension instalments paid to a pensioner after he passes the scheme s normal retirement age (NRA), even where the pension first comes into payment before NRA. Law Firm of the Year The Lawyer Awards 2011

2 The legal background The aim of the EU Acquired Rights Directive 1977 (the Directive) was to ensure that the laws of Member States safeguarded employees rights in circumstances where a business, or part of a business, was sold. The Directive was originally implemented in the UK by the Transfer of Undertakings (Protection of Employment) Regulations 1981 (TUPE 1981). The current TUPE provisions repealed and replaced TUPE 1981, and came into force on 6 April TUPE applies where there is a transfer of a business, or a part of a business, that retains its identity after the transfer. English courts and employment tribunals are required to interpret TUPE in such a way as to give effect to the general purpose of the Directive, which is to safeguard employees' rights on the sale of a business. The aim of TUPE is to protect employees terms and conditions of employment when a business is transferred from one owner to another (as distinct from a sale of shares in a company). The terms and conditions of the employees employment transfer, so that the employees are treated as if they had always been employed by the new business. The Directive provides that the business seller s rights and obligations arising from a contract of employment or from an employment relationship existing on the date of transfer should be transferred to the buyer. The Directive also provides that employees rights to benefits for old age, invalidity or survivors under the seller s pension schemes do not transfer. This is known colloquially as the pensions exception. Therefore, under the pensions exception, most rights under occupational pension schemes do not transfer to the buyer on a business sale. However, those rights which fall outside the benefits classed as old age, invalidity or survivors do transfer under TUPE. Any right which does not properly fall into such a categorisation may transfer to the purchaser of the business. The Beckmann and Martin cases, which were heard by the European Court of Justice (ECJ), were the first cases to consider whether certain enhanced pension benefits on redundancy should be classed as benefits relating to old age, invalidity or survivors. The ECJ concluded that enhanced benefits on redundancy could not be classed as old age benefits because they were not paid at the end of the member s normal working life. Therefore, the ECJ decided, these benefits fell outside the pensions exception under the Directive and in TUPE, and liability for them did transfer to the new business. The decisions of the ECJ in the Beckmann and Martin cases gave rise to uncertainties as to whether early retirement benefits unrelated to redundancy could transfer to a new business owner as a result of a TUPE transfer. As the liabilities arising can be substantial, it is common practice for parties to a business sale to negotiate a Beckmann indemnity protecting the buyer against any liabilities arising as a result of claims for pension rights which may be lost following a business transfer. 02 Norton Rose LLP May 2012

3 This case is the first time that the scope of so-called Beckmann liabilities has been considered by an English court. Facts of the case The case related to the sale in 2007 by P&G of its tissue towel business to SCA and concerned the interpretation and operation of certain contractual and statutory provisions relating to the pension benefits under the Procter & Gamble Pension Fund (the P&G Fund) of 129 employees at P&G s Manchester site. Before the sale, the 129 employees were active members of the P&G Fund. The asset sale and purchase agreement (the Agreement) between P&G and SCA provided that SCA, as purchaser, would be liable for any accrued pension liabilities that transferred to it from P&G under TUPE, and that the purchase price would be reduced to reflect such liabilities. Although P&G offered to include a BeckmannBeckmann indemnity, SCA refused and no such indemnity was included in the Agreement. The rules of the P&G Fund provided for a NRA of 65. Early retirement was subject to the consent of the employer and applied to both active and deferred members on or after attaining the age of 55. Early retirement benefits taken before NRA were subject to actuarial reduction for early payment, with the amount of the reduction depending on whether or not a member had accrued 15 years of service before retiring. There were two issues in dispute: whether the provision for early retirement benefits in the P&G Fund transferred under TUPE to SCA and if there was such a transfer, whether it constituted a liability for the purposes of the Agreement which should be taken into account in adjusting the purchase price. SCA argued that the transferring employees rights to early retirement benefits had transferred under TUPE and that the additional liability imposed meant that the purchase price for the business should be adjusted accordingly. SCA s actuary calculated the value of the additional liability at 19 million, the amount by which SCA contended the purchase price should be reduced. P&G disputed this argument. P&G s actuary calculated that no adjustment to the purchase price was required, as the early retirement rights did not transfer, or if they did, their value was zero, as they had not accrued at the time of the transfer since they were contingent on the employer s consent. Norton Rose LLP May

4 The Court identified three questions: Had the transferring employees rights, and the transferring company obligations, such as to transfer pursuant to TUPE? The Court s answer was yes. In Hildyard J s view, the phrase rights and obligations in both the Directive and in TUPE is to be liberally interpreted without regard to domestic distinctions between a discretionary entitlement and a legally enforceable right. Hildyard J accepted P&G s argument that the transferring employees had no contractual right (subject to the contingency of the employer s consent) but only the expectation of being fairly considered for early retirement and this right transferred to SCA under TUPE. The Court also concluded that the right was capable of being valued and could be calculated by reference to the actuarial assumptions referred to in the Agreement. Did liability for all early retirement benefits or only liability in respect of the enhancements transfer under TUPE? This issue arose because SCA claimed that employees had lost two rights if those rights did not transfer under TUPE: the right to be considered for early retirement (subject to employer consent) on or after reaching age 55, and thereby qualifying for a pension payable from early retirement to state pension age under the P&G Fund rules; and the ability, after the business transfer in 2007, for employees with less than 15 years service to accrue further pensionable service in the P&G Fund, which would enable their early retirement benefits to be calculated using the more favourable actuarial reduction which applied to those with 15 or more years service. P&G s argument was that, as the transferring employees retained rights to a deferred pension in the P&G Fund in respect of service before the business transfer, the transfer under TUPE of liability for full early retirement benefits would lead to double recovery. SCA argued that this was the appropriate outcome, since the obligation to ensure full funding of the transferring employees benefits also passed under TUPE. During the hearing, this question came to be referred to as the windfall or smiling pensioner point. The Court considered whether it could it be correct that, as the transferring members were entitled to deferred pensions from the P&G Fund, TUPE also entitled them to claim the same benefits (together with any enhancements) from SCA? This would mean that P&G would be required under the terms of the Agreement to pay SCA the cost of providing pensions when it was already liable to fund the deferred benefits in the P&G Fund. Hildyard J commented that such a windfall might well make a pensioner smile, if it dawned on him to make a claim so as to obtain a double pension. He 04 Norton Rose LLP May 2012

5 also noted that SCA s grin might be even broader if the pensioner made no such claim, so that, having obtained the payment from P&G, it retained the purchase price adjustment itself. The Court held that the liability transferring under TUPE was to provide enhancements, not the full early retirement benefits. The only the rights under the P&G Fund which transferred were those which had been lost by the transferring employees when they ceased active membership as a result of the sale of the business. These were rights to be considered for early retirement benefits and receiving the early retirement pension, in addition to better actuarial reduction factors for the early payment of pension which applied after 15 years service. The intention of the Agreement was to reimburse SCA for liabilities transferring under TUPE, not to give SCA a 19 million windfall profit. What was the scope of Regulation 10(2) TUPE and the meaning of old age benefit? Hildyard J noted the tortuous double negatives in the Beckmann judgment that is, benefits which are not benefits for old age, invalidity or survivors are not subject to the pensions exception and do transfer under TUPE. He considered whether benefits first triggered as early retirement benefits must be treated as such even after NRA that is, once an [early retirement benefit], always an [early retirement benefit] and decided that this would be counter-intuitive. He concluded that the Beckmann and Martin cases did not suggest that a pension being paid to a 100-year-old is not an old age benefit simply because by the consent of the employer it initiated at 64 and not 65. Consequently, early retirement benefits could be old age benefits so long as they continued to be paid from the same scheme after NRA, and therefore were not part of the liabilities transferring under TUPE. 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 NRA. Comment In Beckmann, the liabilities which the ECJ decided transferred on the business sale were those relating to pension enhancement in circumstances where the member was made redundant from his employment. This judgment has extended the liabilities which transfer to include those relating to a right to be considered for early retirement and then receive a pension between actual retirement date and NRA, plus the opportunity to increase the years of service in the transferring employer s scheme which would then have resulted in the application of more favourable reduction factors in respect of early retirement benefits. Norton Rose LLP May

6 Although the judgment has been trumpeted by some as clarifying the TUPE rules in respect of transferring pension liabilities, many questions remain unanswered, and not least of these is what exactly is the buyer of a business expected to do in such circumstances? In this case, as SCA refused to include the Beckmann indemnity in the Agreement, the requirement arose for the indemnity to be assigned a value and it is not clear how this calculation is to be made. We reported in April s update on the case of Kuehne + Nagel Drinks Logistics Ltd. v HMRC where employees who ceased to accrue benefits under a seller s defined benefit pension scheme, and who threatened industrial action, were paid 4,800 each as compensation for loss of future defined benefit pension rights. Although there were no details given of how this sum was agreed, it is likely that it was to some extent an arbitrary figure, as the loss must be impossible to quantify accurately. If the value of Beckmann liabilities is to be calculated on future TUPE transfers, this may make transactions structured in this way more expensive, lengthy and complex, and thus less attractive. Another issue arising is that the P&G case considered early retirement benefits that were subject to employer consent. If the liability for such benefits is to pass to the purchaser, how is the purchaser to exercise its role under the transferring scheme rules in considering whether or not to give consent to members for early retirement? A further issue that was not considered was how to value early retirement benefits in schemes where no employer consent is required before taking an early pension. Any calculation of the potential liability for such entitlements could prove to be a big disincentive to undertake a TUPE transfer at all, given that indemnities in transaction agreements are usually subject to caps and time limits. We understand this decision is likely to be appealed. 06 Norton Rose LLP May 2012

7 Notes

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