TUPE and Pensions: What Happens to Pension Rights on Transfer?

Pensions are a complex and often costly area of TUPE transfers. While occupational pension schemes themselves don't transfer, employers must provide minimum pension provision and honour contractual pension obligations.

Core Principle: Pensions Are Different

Why Pensions Get Special Treatment

Pensions excluded from TUPE because:

• Occupational pension schemes are trusts
• Complex regulatory framework
• Funding and actuarial issues
• Multi-employer schemes common
• Would make transfers impractical

But employee protections still apply.

Legal Framework

Governed by:

• TUPE Regulations 2006, Regulation 10
• Pensions Act 2004, Section 258
• Occupational and Personal Pension Schemes Regulations 2006
• Pensions Regulator guidance

What Doesn't Transfer

Occupational Pension Schemes

The following do NOT transfer:

• Membership of old employer's occupational scheme
• Scheme itself - remains with old employer
• Accrued benefits - stay in old scheme
• Defined benefit rights - don't transfer
• Defined contribution pots - remain in old scheme
• Final salary promises - not transferred

Employee's Accrued Rights Protected

Important distinction:

• Membership ends on transfer
• But accrued benefits remain
• Preserved in old scheme
• Employees retain pension already built up
• Can usually take with them or leave preserved

What Must Be Provided

Minimum Pension Requirement

If old employer provided occupational pension, new employer must offer:

Option 1: Match contributions up to 6%

• Defined contribution scheme
• Employer matches employee contributions
• Up to 6% of basic salary
• Employee can contribute more (unmatched)

Option 2: 6% employer contribution

• Occupational defined contribution scheme
• Employer contributes minimum 6% of basic salary
• Regardless of employee contribution

Basic Salary Definition

6% calculated on:

• Basic pay only
• Not overtime
• Not bonuses
• Not benefits
• As stated in contract

Example: Employee on £30,000 basic salary plus bonus. Minimum pension = 6% × £30,000 = £1,800 per year employer contribution.

Types of Pension Schemes

Defined Benefit (Final Salary) Schemes

Old employer had DB scheme:

• Employee accrues pension based on salary and service
• Promise to pay specific pension in retirement
• Employer bears investment risk
• Usually closed to new members

On TUPE transfer:

• Membership ceases
• Accrued benefits preserved
• New employer must provide minimum DC provision
• NOT required to provide DB equivalent
• Significant loss of value for employees

Defined Contribution Schemes

Old employer had DC scheme:

• Contributions paid into individual pot
• Employee bears investment risk
• Pension depends on pot size at retirement
• More common for modern schemes

On TUPE transfer:

• Old pot remains invested
• Can usually transfer to new scheme
• New employer must match or exceed minimum
• Less disruption for employees

Stakeholder Pensions

Basic DC pension:

• Low charges
• Flexible contributions
• No penalties for stopping
• Minimum standards

Can satisfy TUPE requirements if contributions meet minimum.

Personal Pension Contributions

Contractual Obligations Transfer

If old employer contributed to employee's personal pension:

• This obligation transfers under TUPE
• New employer must continue contributions
• At same rate
• Into employee's existing pension
• Or provide equivalent alternative

Different From Occupational Pensions

Personal pensions are:

• Individual contracts
• Between employee and provider
• Employer contribution is contractual term
• Therefore transfers like any contract term

Example

Old employer pays 8% into employee's personal pension:

• New employer must pay at least 8%
• Can be into same pension
• Or into new scheme if employee agrees
• Cannot reduce to 6% minimum (contractual obligation)

Matching Contributions

How Matching Works

If new employer offers match:

Employee Contributes	Employer Matches	Total
0%	0%	0%
3%	3%	6%
6%	6%	12%
10%	6% (max)	16%

Employer only matches up to 6% unless higher contractual obligation.

Employee Choice

Employees can choose:

• Not to contribute (no match)
• Lower contribution (lower match)
• Higher contribution (match caps at 6%)

New employer's obligation is to match up to 6%, not force contributions.

Higher Contractual Obligations

When More Than 6% Required

New employer must provide more if:

• Old contract specified higher contribution
• Custom and practice of higher contributions
• Collective agreement provides for it
• Enhanced pension part of contractual terms

Cannot reduce to statutory minimum if contractual obligation higher.

Example

Old employer contributed 10% non-contributory:

• This is contractual term
• Transfers under TUPE
• New employer must provide 10%
• Cannot reduce to 6% minimum
• Even if employee agrees (change void if connected to transfer)

Setting Up Pension Provision

New Employer's Steps

Before transfer:

1. Establish what old employer provided

   • Occupational DB or DC?
   • Personal pension contributions?
   • Contribution rates
   • Employee contribution requirements
   • Any enhanced terms

2. Decide approach

   • Join new employer's existing scheme?
   • Set up separate scheme?
   • Use stakeholder pension?
   • Match or exceed minimum?

3. Arrange scheme

   • Select provider
   • Set up employer scheme
   • Register with Pensions Regulator
   • Arrange payroll deductions

4. Inform employees

   • Explain new arrangements
   • Provide scheme details
   • Explain any differences
   • Give time to consider

Timeline

Must have provision in place:

• From transfer date
• No gap in pension provision
• Must be equivalent immediately

Auto-Enrolment Interaction

Separate Obligations

Auto-enrolment applies regardless of TUPE:

• Employer must auto-enrol eligible employees
• Minimum contributions (currently 8% total, 3% employer)
• TUPE minimum may be higher (6% employer)
• Whichever is higher applies

Typical Position

Most TUPE transfers:

• TUPE minimum (6% employer) exceeds auto-enrolment minimum (3%)
• So TUPE requirement applies
• Satisfies auto-enrolment too
• Use qualifying scheme for both

Contractual May Be Even Higher

If contractual obligation exceeds both:

• That higher rate applies
• Satisfies TUPE and auto-enrolment
• Cannot reduce even if both statutory minimums lower

Loss of Defined Benefit Rights

Significant Issue for Employees

Transferring from DB to DC means:

• Loss of guaranteed pension
• Investment risk transfers to employee
• Likely lower pension in retirement
• Loss of spouse's pension guarantees
• Loss of inflation protection

But TUPE only requires DC minimum provision.

Calculating Impact

Employee loses:

• Promise of pension = 1/60 or 1/80 of final salary per year of service
• Guaranteed by employer
• Usually index-linked
• Spouse's pension included

Gets instead:

• Pot built up from contributions
• Depends on investment returns
• No guarantee of final amount
• Must buy annuity or drawdown

Example: Employee aged 40 with 10 years in DB scheme promising 1/60 final salary per year:

• Currently has 10/60 (1/6) final salary accrued
• At 65 would have accrued 35/60 final salary
• On TUPE transfer, membership ceases at 10/60
• New employer provides 6% DC contribution only
• Significant loss of future pension value

No Compensation Required

TUPE does not require:

• Compensation for loss of DB pension
• Enhanced contributions to offset
• Making up the difference
• Bridging payments

Only the statutory minimum DC provision.

Consultation on Pensions

Must Inform and Consult

On pension changes:

• Explain current pension arrangements
• Describe new employer's provision
• Highlight any differences
• Explain impact on employees
• Give time for questions
• Consider feedback

Information Requirements

Must provide:

• Details of old scheme
• Details of new provision
• Comparison
• How it meets TUPE requirements
• What happens to accrued benefits
• Transfer options

Options for Employees

What Employees Can Do

After TUPE transfer:

1. Leave benefits in old scheme

   • Preserved pension
   • Paid at retirement age
   • Continue to be revalued

2. Transfer old pension to new scheme

   • If schemes allow
   • Transfer value calculated
   • May lose guarantees
   • Take advice - transfers can be poor value

3. Join new employer's scheme

   • From transfer date
   • Build up new pension
   • Separate from old benefits

4. Top up contributions

   • Contribute more than minimum
   • Personal contributions
   • Build up pension faster

Transfer Advice

Employees should:

• Not rush to transfer old pension
• Seek independent financial advice
• Understand what they're giving up
• Check transfer value
• Consider both pensions separately

Costs for New Employer

Budget for Pensions

New employer must fund:

• At least 6% of basic salary per transferring employee
• Or match contributions up to 6%
• Higher if contractual obligation
• Ongoing cost for employment duration
• Administration costs

Example Calculation

10 employees transferring:

• Average basic salary £30,000
• 6% minimum = £1,800 per employee per year
• Total annual cost = £18,000
• Plus administration and charges

Factor into purchase price.

Due Diligence Essentials

Information to Obtain

Before transfer, establish:

• What pension provision old employer made
• Type of scheme (DB, DC, personal, stakeholder)
• Contribution rates
• Employee contribution requirements
• Enhanced terms for any individuals
• Any arrears or unpaid contributions
• Number of active members
• Payroll pension deduction arrangements

Assess Liability

Calculate:

• Minimum pension cost
• Any enhanced obligations
• Setup costs for new provision
• Administration costs
• Ongoing expense

Plan Implementation

• Select pension provider
• Set up scheme
• Register with Regulator
• Brief payroll
• Prepare employee communications

Common Pitfalls

Underestimating Obligations

New employer assumes:

• 6% is always enough
• But may be higher contractual obligation
• Or personal pension contributions transfer
• Or enhanced terms for individuals
• Check each employee's terms

Delaying Setup

Must have provision ready:

• From transfer date
• Not "within reasonable time"
• Gap in pension coverage breaches TUPE
• Employees can claim

Not Consulting

Pension changes significant:

• Must inform and consult
• Explain fully
• Allow questions
• May be complaints to Pensions Regulator

Ignoring Personal Pensions

Easy to overlook:

• Check if old employer paid into personal pensions
• These obligations transfer
• May be higher than 6%
• Must continue

Summary

What Doesn't Transfer

• Membership of occupational pension schemes
• Scheme itself
• Defined benefit promises
• Accrued benefits (stay with old scheme)

What Does Transfer

• Obligation to provide pension
• Personal pension contribution obligations
• Contractual enhanced terms
• Duty to match or exceed minimum

New Employer Must Provide

• Minimum: match contributions up to 6% of basic salary, OR
• Employer contribution of 6% of basic salary
• Higher if contractual obligation
• Into defined contribution scheme
• From transfer date

Key Points

• Pensions specifically excluded from TUPE
• But minimum provision required
• Personal pension obligations transfer fully
• Contractual obligations may exceed minimum
• Cannot reduce to statutory minimum if contract requires more
• DB to DC transfer significant loss for employees
• Due diligence critical to understand obligations
• Must have provision ready for transfer date

Practical Steps

• Establish current pension provision
• Identify any enhanced terms
• Calculate minimum obligation
• Set up new scheme before transfer
• Inform and consult employees
• Factor cost into purchase price
• Budget for ongoing expense

Pensions are often overlooked in TUPE planning but represent a significant ongoing cost and legal obligation. Get it right from the start to avoid employee complaints, legal claims, and regulatory intervention.