Auto-enrolment and TUPE

March 12, 2015

Now that more and more employers have reached their pension auto-enrolment staging dates and are obliged to enrol their eligible jobholders into an auto-enrolment compliant pension scheme,  the relationship between auto-enrolment and TUPE pension protection is becoming more acute. Our clients regularly seek advice on this subject, and this article covers some of the more common questions we are asked.

What if neither the outgoing employer nor the new employer have reached their staging date at the transfer date?

Where there is a relevant transfer, the auto-enrolment regime does not affect the existing obligations on  new employers to provide pension benefits to transferring employees.

If immediately before the transfer there is an occupational pension scheme, the new employer  is obliged to provide pension benefits to those transferring employees who are:

  • an active member of the scheme;
  • eligible to be such a member; or
  • in a probationary period to become eligible to be a member.

In these circumstances, the  new employer is required:

  • In relation to DC schemes, to match employee contributions up to 6% of basic salary.
  • In relation to DB schemes, to ensure that it satisfies either the statutory reference scheme test (for contracting-out purposes) or, alternatively, that it provides for an annual accrual of benefits, the value of which is not less than the value of 6% of member's pensionable pay (excluding the value of any benefits that are attributable to members' contributions).

Any contractual entitlements to pension contributions into personal pension plans must be continued under normal TUPE principles.

What questions does the new employer have to ask about auto-enrolment before transfer??

The new employer will need to make an assessment of the transferring employees’ auto-enrolment status at the point of transfer to understand who are “eligible jobholders”.  

If the new employer has passed its staging date and the  transferred worker is an “eligible jobholder” on the transfer date, he or she must be automatically enrolled into a qualifying pension scheme. 

In practice there are three scenarios:

  1. If the scheme used to meet TUPE requirements is also a qualifying scheme, the  new employer does not need to automatically enrol the worker.
  2. If the scheme used to meet TUPE requirements is not a qualifying scheme, the new employer must use a different qualifying scheme to meet its auto-enrolment duties and enrol the employee into this scheme.
  3. If the transferred employee is an eligible jobholder on the transfer date, but was not a member of a pension scheme, the new employer should automatically enrol the transferred employee into a qualifying pension scheme on the transfer date.  To assist with the management of this process, the new employer can use the three month postponement period  available under the auto-enrolment regime providing that  the worker is still able to opt in to a TUPE-compliant and qualifying scheme during the postponement period.

What if the transferring employer has passed its staging date but the new employer has not?

The Pensions Regulator does not address this in its guidance.

In this situation, it seems the auto-enrolment duties will not apply to the new employer until it has itself passed its staging date. However, it has also been argued that the transferee employer will be required to comply with the auto-enrolment duties in respect of the transferring employees (albeit not in respect of the remainder of its workforce until the staging date) under normal TUPE principle. The position is, unfortunately, unclear.

How should jobholders who have exercised the right to “opt out” of the qualifying pension scheme before the transfer date be treated at the point of transfer?

All jobholders who have been automatically enrolled into a qualifying pension scheme have a statutory right to opt out of whichever scheme he or she has joined. He or she will be able to change his or her mind and join the employer's scheme at a later date.

If a jobholder who has exercised the right to “opt out” of a qualifying pension scheme is then part of a TUPE transfer, the receiving employer which has passed its staging date will be required to automatically enrol the jobholder. The new employer will have to treat the jobholder as if he or she were a new employee and apply the usual procedures to enrol the jobholder into the pension scheme.  This obligation remains even though the eligible jobholder previously exercised the right to “opt out” with their previous employer.

What rate of pension contributions should be paid?

Until April 2014, there was a mismatch between the employer contribution requirements under the TUPE and auto-enrolment regimes.  

The mismatch arose because  on a  TUPE transfer the new employer is required to match employee contributions of up to 6% of basic salary (in DC schemes).  This is more generous than the required contribution under the auto-enrolment regime.   In some cases, transferring employees could be placed in a more favourable position post-transfer than had they remained with their former employer, particularly if the former employer provided benefits only at the statutory minimum level that applies to pension schemes that qualify for automatic enrolment.

After a lengthy consultation exercise, the government changed the pension protection requirements which apply on a TUPE transfer.   From 6 April 2014 onwards a new employer will satisfy the pension protection requirements if either:

  • it matches the contributions paid to a pension scheme by transferring employees of up to 6%.  For contributions at or above 6%, the new employer must contribute a minimum of 6%; or
  • it matches at least the amount of contributions paid by an outgoing employer, used solely for the purpose of producing money purchase benefits.

The practical effect of these changes is that employees who are members of a qualifying pension scheme for auto-enrolment purposes are not placed in a more favourable position if they  are subsequently transferred to a new employer under TUPE. That new employer can continue to pay the lowest of the two rates and does not need to match contributions up to 6%.   


Related pages:

Experts on the human side of enterprise more

icons Addthis Print Contact Register

Contact

tel: +44 (0) 20 7628 2000
10 Finsbury Square, London, EC2A 1AF
View map


For more information

 image

Helen Farr
Partner
Direct dial: +44 (0)20 7614 2623
hfarr@foxwilliams.com

Accreditations

  • Top Ranked Chambers UK 2014 - Leading Firm
  • Ranked in Chambers Europe 2013 - Leading Individual
  • Ranked in Chambers Global 2014 - Leading Firm
  • Legal 500 - Leading Firm
  • The Lawyer UK 200 - Listed Firm
  • The Law Society Excellence Awards 2012 - Shortlisted
  • Investors in People - Bronze