Tupe trouble

It is time to look at the sticky problems the Tupe regulations are creating for companies outsourcing government activities, says Teresa Hunter

Tupelo Honey, prized for its fine amber, is one of the most expensive, labour-intensive and resource-draining nectars nature produces. Bees are placed on platforms on tupelo gum trees, while beekeepers constantly clean the combs. Only the honey made when the gum trees are in blossom is collected. No blossom, no Tupelo honey.

But, when the gum trees are in full bloom, then as Van Morrison sang, sweet… sweet Tupelo Honey.

We have our own Tupelo Honey in the pensions world, although its low hanging fruit is bitter sweet. Hundreds of thousands of employees have pensions protected by Tupe, or Transfer of Undertakings (Protection of Employment) provisions intended to safeguard their retirement income when their company is taken over, job outsourced, or in the case of the public sector handed over to a charity or private enterprise. But Tupe is losing its bloom. Groups of employees are incensed to discover that they can still lose the pension despite Tupe reassurances.

On the other side of the balance sheet, employers who took on pension obligations in good faith, find they cannot possibly afford obligations that are now pulling them under. So what went wrong? Was the logic of Tupe flawed from the outset, in which case should it be overhauled and replaced? Were individual companies or charities badly advised or naive?

Importantly, against a background of talk of cuts in the public sector and the need to switch activities over to private industry, do the Tupe regulations render such ambitions impotent? Have we reached the point where no private employer can afford to offer the high quality schemes currently available to state staff, particularly when its own workforce is on significantly inferior arrangements?

To answer those questions we need to look how current arrangements developed. Tupe regulations were introduced in1981 following an EU directive to ensure employees’ terms and conditions were protected when their company was taken over. All right and proper. Company pensions were exempted from these regulations, although later measures were introduced to offer limited safeguards in the private sector, and much more protection for state employees.

In 2000, the Cabinet Office issued a statement of practice protecting the pensions of employees of central government whose functions were transferred to the private sector. In 2003 this gold plating was extended to local authority workers.

And gold plating it was. Anyone taking over an activity outsourced by a local authority, for example, is required to offer staff an equivalent pension to the one provided by the state.

Whether employers understood what they were taking on is a moot point, raising serious questions about the advice they received. Either way, many have been badly stung.

Whether employers understood what they were taking on is a moot point, raising serious questions about the advice they received. Either way, many have been badly stung

Quite how serious the problem is will depend on how the pension arrangement was constructed. There are basically three approaches. Firstly, a private employer can remain an associated member of the public sector relevant scheme. He can join an alternative arrangement set up by a group of companies facing a similar problem. Or he can set up his own fund. The various merits of these alternatives do not concern us here. Crucially they all leave the new employer facing a huge bill for pensions over which he has no control.

Things are different in the private sector. If an employee has a pension and his company is taken over, then the new owner must provide him with a pension, but pretty much any old pension will do. Many staff are finding that, for all the assurances given at takeover, a couple of years down the road their final salary scheme is closed and there is nothing they can do about it.

It seems to me we need to look again at the Tupe regulations to see if pensions can be more fairly protected, without crippling a new employer. This will be vital if we are to roll back the state and encourage private industry. Otherwise, things will be getting sticky for the whole economy.

Teresa Hunter is personal finance editor of Scotland on Sunday