Taking over pension liabilities

08 September 2005
Taking over pension liabilities

Rebecca Emmett, senior associate in employment law at Squire, Sanders & Dempsey, offers advice on pension provision when you take over a business

The problem
You have recently purchased a business and as a result have inherited employees from that business. You are aware that their terms and conditions remain unchanged and are now being told that you must also provide a pension to the employees you have inherited.

The Law
The Transfer of Undertakings (Protection of Employment) Regulations 1981, otherwise known as TUPE, provide that where a business is sold from one party to another, the employees of that business automatically transfer to the new owner. The new owner takes on all liabilities in relation to those employees, including their contracts of employment with the seller.

Under the Pensions Act 2004, which came into force on 6 April 2005, buyers of a business to which TUPE applies are required to provide minimum pensions to certain employees who transfer to them. The buyer of the business is free to choose the type of scheme it wants to provide for those employees - ie, defined benefit (final salary), defined contribution (money purchase) or stakeholder scheme. If the new employer decides to provide a defined contribution or stakeholder scheme, it must match employee contributions up to a maximum of 6%. If the new employer chooses to provide a defined benefit scheme, that scheme must meet statutory minimum standards.

TUPE also imposes an obligation on the buyer and seller of a business to consult with employees before the transfer about the transfer and any changes that are envisaged. This should include consultation in respect of the pension that will be provided post-purchase.

Expert Advice
The crucial question is to see whether or not TUPE applies to the purchase. If a business or part of a business is being bought as a going concern, then generally TUPE will apply. Examples of this include a hotel business buying the assets of a local restaurant which will continue to operate, or a hotel business which previously outsourced its payroll function wanting to change the provider.

Before buying any business the buyer should carry out a thorough and careful investigation into the terms and conditions of employees, including as much information as possible in respect of the provision of pension benefits. The buyer must also consider what future pension benefits it should provide. The buyer may choose to take over the pension scheme of the seller, in which case it is crucial for the buyer to investigate whether this could result in any funding liability. In some cases it will be necessary to ensure that the purchase agreement contains appropriate indemnities in relation to any shortfall of the pension fund and/or warranties in respect of the information that has been provided by the seller.

Indemnities are generally more appropriate where less detailed information is being provided by the seller. Warranties are generally more appropriate where more detailed information has been provided.

In situations where part of a business is outsourced and the employees are transferring from the old contractor to the new contractor, it will be difficult to obtain any information. For this reason it is important when businesses outsource parts of their business, that the contractor is obliged to provide information on the termination of that contract, either to the customer or to the new contractor.

Employers should also remember their duty to consult with employees well in advance of the proposed purchase.

Check List

  • Find out if TUPE applies to your business purchase - if so you will be required to provide minimum pensions to certain employees who transfer to you.
  • Consult with employees before the transfer.
  • Research the terms and conditions of said employees, including pension benefits.
  • Consider what pension benefits you will provide.
  • If taking over seller's existing pension scheme, find out if there is any funding liability.

Failure to provide a pension scheme post-transfer could result in claims of unfair dismissal, the maximum award in which is currently 56,800, or claims for breach of contract. Failure to consult properly with employees can lead to additional claims, which could result in maximum compensation for each employee of 13 weeks' pay.


Rebecca Emmett Squire, Sanders & Dempsey 020 7189 8162 remmett@ssd.com
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