When employees transfer to a buyer as a result of the sale of a business, the European Communities (Protection of Employees’ Rights on Transfer of Undertakings) Regulations 2003 (TUPE) provide that all rights and obligations of the seller under the employees’ contracts of employment automatically pass to the buyer with the exception of benefits payable under occupational pension schemes relating to “old age benefits”.

However, the European Court of Justice (ECJ) caused some confusion in relation to this pensions exception under TUPE when it decided in 2002 in two cases  that certain benefits payable under a pension scheme such as specifically enhanced benefits payable on redundancy and early retirement, were not “old age” benefits within the meaning of TUPE and did transfer to the buyer under TUPE.  These judgments cast some uncertainty on the extent to which pension liabilities may transfer to a buyer on an asset sale.

The English High Court attempted to clarify the extent of the benefits under a pension scheme, liability for which automatically transfer to the buyer on an asset purchase.  It held that:

• If the right to early retirement benefits is discretionary, the buyer is obliged to consider any application for the early retirement benefit fairly and in good faith but the buyer would only assume liability in relation to any enhanced element of the benefit (i.e. the amount over and above any deferred pension that remains payable from the seller’s scheme) and 
• The claim related only to benefits payable from early retirement up to normal retirement date as early retirement benefits become “old age” benefits once they continue to be paid from the same scheme after normal retirement date

This is a useful decision for those involved in asset sales as it pragmatically limits the maximum size of a claim to the payment in the years up to normal retirement date, a much lower level than was previously feared.  However as an uncertain liability still transfers on an asset sale, it would be wise for a buyer to seek an indemnity from the transferor in respect of such liabilities.

Contributed by Lorna Osborne, Mary Greaney and Michael Wolfe.