The Pensions Ombudsman has held that a member of the Principal Civil Service Pension Scheme (PCSPS) who TUPE-transferred to a private provider and then back to her original Civil Service employer was entitled to retain her unreduced early retirement pension age of 55 because of the protections afforded her under Regulation 10(2) of TUPE.

This insight explains why some employees who are TUPE-transferred from a public sector employer to a private provider will retain their right to enhanced unreduced pension terms, and how those rights will continue to apply on further TUPE transfers.

Facts of the case

The member joined the PCSPS in 1987 and became a member of the 1972 Section. At the time, the rules of the PCSPS provided her with the right to retire with an unreduced pension from age 55 if she remained in active service and did not opt out of the PCSPS or resign.

In 2016, the member was transferred to a private provider but continued to work on the same services as she had prior to her transfer. However, she was treated as a deferred member of the PCSPS from that point and elected to leave her deferred benefits in the scheme.

In 2019, the member was TUPE-transferred back to her original employer and was reinstated in the Alpha Section of the PCSPS. She believed that this meant she had rejoined her original 1972 Section of the PCSPS and that she continued to be entitled to an unreduced early retirement pension from age 55.

Under the PCSPS regulations, the member lost the right to retire from age 55 when she left active service with her original Civil Service employer following her TUPE transfer in 2016. The Alpha Section rules also did not provide a right to an unreduced pension from age 55.

The Deputy Pensions Ombudsman found that the member’s right to unreduced early retirement from age 55 had nonetheless transferred under TUPE. This was because the right to retire early at age 55 was not an ‘old age’ benefit under the rules of the PCSPS, but an early retirement benefit (ERB).

The Deputy Pensions Ombudsman reached this conclusion by applying the rationale from earlier decisions in this area (Beckmann and Proctor & Gamble). At the time the member joined the PCSPS, the normal retirement age was 60 and the ‘old age’ benefits in the PCSPS therefore applied from that age. By contrast, the unreduced ERB was contingent on the member remaining in service until age 55. Accordingly, the ERB was not an ‘old age’ benefit that fell within the pensions exclusion of Regulation 10(2) of the TUPE Regulations.

As a result, the Civil Service employer was directed to fund the ERB shortfall cost (the Shortfall).

How employers may need to address the Shortfall

Employers should note that correcting historically underpaid ERBs following a TUPE transfer, or transfers, may not be as simple as topping up the Shortfall in the applicable scheme and backdating the underpaid pension to the affected member. This is because the scheme regulations may not permit this approach, as was the position in this case.

The PCSPS Regulations do not provide for an unreduced early retirement pension from age 55 under the Alpha Section of the PCSPS, which was the section the member was enrolled into when she transferred back to the Civil Service in 2019. As a result, the PCSPS could not accommodate the payment of her unreduced ERB from age 55 out of the PCSPS without breaching its regulations.

The employer therefore needed to establish the value of the Shortfall and compensate the member for this financial loss. This could be done either through making direct pension and lump sum payments of the amount of the Shortfall each year or by paying the member a lump sum of equivalent value to the cost of buying an annuity to cover the Shortfall (adjusted for tax). The Deputy Pensions Ombudsman noted that she only had power to direct the latter approach.

Practical steps employers should take in respect of ERB rights

Whilst a member may lose an ERB under the regulations of their public service pension scheme following a TUPE transfer, this determination confirms that these rights will nonetheless transfer with the member because of the protection of the TUPE regulations.

To avoid being caught out by this, employers should:

• ensure members’ ERB entitlements are reviewed prior to a TUPE transfer and included in due-diligence investigations and disclosures, and where possible, seek relevant indemnities in relation to the risks arising;
• trace these rights across each historic transfer and ensure member records are kept up to date on each subsequent TUPE transfer;
• where a particular cohort of members appear to have been affected by lost ERB rights on a TUPE transfer, undertake a historic analysis to determine if any other members are affected; and
• ensure communications with members clearly explain their entitlements and the basis on which ERB rights are retained.

How Capsticks can help

Our market-leading Pensions team has extensive experience advising on all aspects of the public service pension schemes, including the PCSPS, the Local Government Pension Scheme (LGPS), the NHS Pension Scheme, and the police and firefighter schemes, among others.

If you would like any support with TUPE or ERB related issues, please contact Partner and Head of the Pensions team Kate Beech or Legal Director and TUPE specialist, Raj Basi.