On 10 September 2001 the DTI issued a public consultation document [PDF] on its proposals to change the regulations concerning the transfer of businesses, contained in the Transfer of Undertakings (Protection of Employment) Regulations 1981 (TUPE). Responses should be sent to the department (email pat.wright@dti.gov.uk) no later than 15 December 2001.

The government needs to update TUPE to comply with the new EC Acquired Rights Directive 2001/23/EC of 12 March 2001. Initially regulation 7 of TUPE specifically excluded occupational pensions schemes. This reflected their exclusion from the 1977 Acquired Rights Directive (77/187/EEC, as amended by Directive 98/50/EC), which has been repealed by the latest Directive. Protection of rights already accrued in UK pension schemes has now been afforded by specific legislation. Continuing rights to participate in a pension scheme following a transfer are, however, still excluded from the legislation.

The government further wishes to end the uncertainty and unfairness surrounding ‘service provision changes’ - the increasing practice of contracting out public services into the private sector. To date these have not been covered by legislation but by a (possibly unenforceable) Statement of Practice "Staff Transfers in the Public Sector" [PDF]. The practice affords much better pension rights to the transferring employees than is available in the private sector, but may not be enforceable. There is also intrinsic unfairness when a public to private transfer is transferred for a second time, giving the transferees much worse protection.

The government considers whether a) to preserve current public sector pension rights as separate from the general TUPE ambit and to produce separate legislative and administrative measures: or b) to amend TUPE to apply to occupational pensions for public and private sector employees.

With respect to the second alternative, the government has put forward four options to cover the required change:

Option 1. If the transferor offered a COSR or a COMP, the transferee would be required to offer a scheme of the same type. It would not have to match the old scheme. A COSR would have to satisfy the Reference Scheme Test (RST) for contracting out in accordance with GN28. In a COMP the minimum payment levels would be those in the contracting-out legislation. If the transferor offered an uncontracted out scheme, the transferee would only have to offer a scheme that was Revenue approved with no specified form of benefits.

Option 1a. This could be improved by a requirement that a COSR would not only have to meet the RST but be required to offer benefits of say no more than 10% lower than the transferor’s scheme. Similarly a COMP could be required to make contributions at the rate of the total rate paid into the transferor’s scheme less the employee’s contributions to the transferee’s scheme. A new GN would probably be required.

Option 2. Here a COSR can be transferred to a COMP and vice versa. If the opposite type of scheme were offered the actuary might have to certify that the new scheme would provide broadly equivalent benefits. A new GN might have to be produced like GN28 to deal with this. An uncontracted out scheme would still be as in Option 1.

Option 2a. Again as in Option 2 but with a safety net analogous to Option 1a.

Option 3. The transferee could choose a salary-related or money-purchase scheme, irrespective of the nature or level of benefits of the transferor’s scheme, provided the new scheme met a prescribed bench-mark. For a salary related scheme this might be RST. Uncontracted out salary related schemes would probably need some new form of actuarial certification. For money purchase schemes a minimum contribution level might be specified.

Option 4. Is a more flexible approach. Here the benefits under the transferee’s scheme should be of similar value to those under the transferor’s scheme. Again actuarial certification will normally be required and a new GN is envisaged.

Anyone wishing to find out more about these proposed changes will find not only the Public Consultation Paper of interest but also the Detailed Background Paper, which is linked to it. It sets out in the annex the impact assessment of the likely costs and benefits of all the above proposals.

The Public Consultation Paper also deals with TUPE issues which are not directly related to occupational pensions. They may, however, be of interest to pensions specialists, as if they affect whether a TUPE regulated transfer has taken place, they ultimately impinge on what pension arrangements need to be made.

The areas covered are briefly:

• The ‘Frankling’ case
• Notification of the rights and obligations of the transferor to the transferee
• Clarification of the ‘economic, technical or organisational’ reason
• Application of the legislation to insolvency proceedings, in line with the ‘rescue culture’ of trying to keep viable businesses going
• Abolition of the hiving down regulation
• Continuity of Employee representation
• Employers’ liability compulsory insurance
• Extension of TUPE to certain employees who work outside the UK.