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High Court ruling sheds light on issues surrounding the transfer of early retirement pension entitlements

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The P&G vs Svenska Cellulose case, being hailed by many as a landmark ruling, provides much needed guidance on the pension implications of the sale of a business under TUPE.

But the judgment may create more problems than it solves.

The P&G case clarifies a number of key areas which were left uncertain after previous decisions failed to specify which employee benefits fall into the TUPE pensions exemption and which transfer to the buyer.

For example, it was ruled that the employee does not need to have a separate contractual entitlement to an early retirement pension in order for that pension to pass under TUPE. This is good news for employees trying to claim benefits from their new employer.

In addition, the ruling also clarified that the new employer is only liable for the shortfall between the benefits which the employee would have received as an active member of the seller's scheme and the amount of the deferred pension to which the employee remains entitled under that scheme. This means the new employer can look to the seller's scheme to provide part of the early retirement pension - a point which had previously been unclear.

The P&G case ruling also clarified that the early retirement pension only counts as an 'early retirement' benefit until the employee reaches his normal retirement age. At that point in time, it becomes categorised as an 'old age' benefit - liability for which does not pass under TUPE - and therefore becomes the seller's responsibility.

While this ruling is good news for the employer, on the principles in the P&G case, the employee will only receive the full amount of their pension at the date of their early retirement if they also draw their deferred pension from the seller's scheme - which will be reduced for early payment. Until they reach normal retirement age, the employee can require their new employer to make up the shortfall, but that top-up melts away as soon as the employee reaches normal retirement age, leaving them to manage for the remainder of their retirement on just the reduced pension payable from the seller's scheme.

So, in essence, the effect of TUPE appears to be that the employee ends up with materially worse benefits. It seems as if in his efforts to prevent the employee from obtaining a windfall at the employer's expense, the judge has gone in the opposite direction with the result that the new employer, at least, gets a windfall at the employee's expense.

This is unusual for a TUPE case, so it may be prudent not to assume that these principles will stand up to closer scrutiny when a similar case next comes before the courts.

Patricia Critchley (pictured) is a director in the pensions team at law firm Cobbetts