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IN THIS ISSUE
p2 Recap – the Beckmann
and Martin cases
p3 Further clarification - the
Procter & Gamble case
p4 The “Smiling Pensioners”
p5 Contact details and more
information
This is a highly complex area and
legal advice should be sought
before making any decisions which
could give rise to pension liabilities
transferring under TUPE.
In 2012 the High Court ruled in the case of The Procter & Gamble
Company v Svenska Cellulosa Aktiebolaget (SCA) and, in
doing so, clarified some of the uncertainty in the interpretation
of the provisions of Transfer of Undertakings (Protection of
Employment) Regulations (TUPE), in relation to early retirement
benefits.
There were however a number of practical questions that
remained unanswered which many commentators had hoped
would be addressed by the Court of Appeal. The parties have
however settled and the appeal was dismissed.
In this LCP M&A update, we consider:
� The position prior to the Procter & Gamble case
� The uncertainties resolved by this particular case
� The practical uncertainties which remain unanswered
� The impact this has on the structure of corporate transactions
LCP M&A UPDATE OCTOBER 2013
TUPE and pensions: The implications for corporate transactions.
Continuing uncertainty on what early retirement benefits transfer on an asset sale as parties settle in the Procter & Gamble case.
LCP M&A Update October 2013 2
If an employee has a contract of employment
transferred to another employer as a result of a
business sale to which the TUPE regulations apply,
the terms of their contract are also transferred.
The TUPE regulations, however, exclude “old-age,
invalidity or survivors” benefits.
Rulings by the European Court of Justice in the
cases of Beckmann (in 2002) and Martin (in
2003) were the first cases to suggest that there is,
however, a need to maintain employees’ rights to
certain early retirement benefits following a TUPE
transfer. Or, in other words, such rights might not
be covered by the old age benefit exclusion in the
TUPE regulations.
Such liabilities can potentially be substantial,
depending on the rights, profile and number of
employees affected. Examples of areas where
claims could arise include:
� Entitlements to enhanced early retirement terms
(for example on redundancy), either through a
company’s pension arrangements or through their
contracts of employment.
� Differences between standard early retirement
rights for in-service members and deferred
pensioners.
These cases however left many questions
unanswered including exactly what benefits
transferred under TUPE and whether the rulings
applied to the private sector. (Both the Beckmann
and Martin cases applied to the public sector).
As a result the typical approach taken for corporate
transactions has been:
� for sellers to resist purchase price adjustments
given the uncertainties regarding the quantum of
the liabilities and indeed whether any claims may
ultimately arise; and
� for purchasers of businesses to negotiate
indemnities to cover the possibility of claims.
However, indemnities in sale agreements often only
provide limited protection as they usually include
caps and time limits, and in any event, depend on
the seller being around and in a position to pay up.
Recap - the Beckmann and Martin cases
3LCP M&A Update October 2013
Further clarification - the Procter & Gamble case
The Pension Scheme The Sale Agreement The Dispute The Judgment
The scheme provided
conventional defined benefits
with typical early retirement
provisions with enhancements
for active members who opt
to retire from age 50 with
employer consent.
These enhancements, which
included no actuarial reduction
in certain circumstances and
a bridging pension payable to
state pension age, were not
payable for deferred pensioners.
The sale agreement provided
that:
� SCA would be responsible
for any liabilities that passed
to them as a consequence of
TUPE; and
� an adjustment to the
purchase price had been
agreed based on the value
of any pension rights which
turned out to transfer under
TUPE.
The dispute seems to have
arisen because Procter
& Gamble felt no rights
transferred, or if they did their
value was £nil, whereas SCA
felt that the full value of all early
retirement rights accrued in
the Procter & Gamble scheme
transferred, so triggering a
purchase price adjustment
calculated by their actuaries as
£19 million.
The Procter & Gamble case
confirmed that:
� A right to be considered for
an early retirement benefit
also transfers where:
� this was discretionary; or
� needed employer consent.
� The benefit will only include
any enhancement above any
deferred pension retained in
the transferring scheme (ie
there is no double-counting
windfall to transferring
employees – this aspect of
the case was referred to as
the “smiling pensioners” [see
“smiling pensioners” below]).
� Benefits can be stopped at
normal retirement (ie only the
benefit instalments payable
from early retirement to the
scheme’s normal retirement
date transfer).
The case related to a commercial dispute between Procter & Gamble and SCA over the sale of Procter &
Gamble’s towel business in 2007. A number of UK employees had their employment transferred to SCA, 129
of whom were previously active members of Procter & Gamble’s pension scheme and who became deferred
pensioners as a result of the transaction.
4LCP M&A Update October 2013
The “Smiling Pensioners”The case clarified that the purchaser would only
be responsible for the payments made up to age
65 (shown in dark green) where the payments
from 65 are retained in the seller’s scheme (shown
in light green).
It had been feared that the purchaser may be
required to continue to pay the pension for life
even though a deferred pension would be payable
in the seller’s scheme from age 65, meaning that
the “smiling pensioners” would receive double
benefits for the period from 65.
Outstanding questions and practical consequences
Whilst this case has shed some welcome
light on what rights transfer, there are still a
number of questions that seem destined to
remain unanswered including:
� What rights must be offered in respect of
future service?
� How any enhancements above benefits
retained in the seller’s scheme should be
provided?
� In particular, how do benefit rights
contingent on the exercise of a discretion or
the giving of a consent be valued?
Action points
Given the continuing uncertainties regarding
the position, and the difficulties in assessing
the quantum of liabilities, purchasers of a
business under TUPE should continue to
seek:
� legal advice on its potential exposure to early
retirement benefits;
� actuarial advice on the possible quantum of
those liabilities; and
� a purchase price adjustment or an indemnity,
as appropriate.
Age
Ann
ual a
mo
unt
of
pen
sio
n
0
10,000
20,000
30,000
55 60 65 70 75
Any questions? If you would like any assistance or further information on the issues raised, please contact David Lane,
Paul Metcalf, Ben Adams or the partner who normally advises you at LCP via telephone on +44 (0)20 7439
2266 or by email to [email protected].
David Lane
+44 (0)20 7432 6643
Paul Metcalf
+44 (0)20 7432 6634
The LCP M&A Update is based on our current understanding of the subject matter and relevant legislation which may change in the
future. Such changes cannot be foreseen. This document is prepared as a general guide only and should not be taken as an authoritative
statement of the subject matter. No responsibility for loss occasioned to any person acting or refraining from action as a result of any
material in this M&A can be accepted by LCP.
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London, UK
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LCP is a firm of financial, actuarial and business consultants, specialising in the areas of pensions, investment,
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