Cost saving people strategies: using subsidiaries for pension provision

05 May 2024      Martin Higgs, AUDE Communications and Campaigns Manager

As part of this year’s UHR annual conference, we will be hosting a Special Interest Group session on Cost Saving People Strategies: Navigating the Tricky Issues.  Along with withdrawing from national pay bargaining and voluntary severance schemes, one of the strategies which we will be discussing in the session is the establishment of subsidiary companies for alternative defined contribution (DC) pension provision. This article is provided ahead of the 2024 UHR Conference by the team at Mills & Reeve.

UCEA and UUK have written to the Government regarding the increases to the employer contributions to the Teachers’ Pension Scheme (TPS) to request greater flexibility in universities’ participation in the scheme.

In the meantime, the increasing financial risk and cost associated with defined benefit (DB) pension provision under the Local Government Pension Scheme (LGPS) and the Teachers’ Pension Scheme (TPS) has led to more post-92 universities considering the establishment of subsidiary companies for alternative DC pension provision as a viable option to save costs.

We have outlined five key pensions and employment law points for post-92 universities to consider if they are contemplating this action and which we will discuss further in the session.

  1. Pension

Whilst it is possible to offer university employees the choice of a DC alternative, such employees will always retain their right to accrue pension benefits in either the LGPS or the TPS (as appropriate).

However, as employment with a subsidiary company of a university is not eligible employment for LGPS and TPS purposes, universities may reduce their DB pension costs by employing new staff through, and/or transferring existing staff to, a subsidiary company.

This allows the university to offer such staff DC pension provision, if it meets certain legislative minimum requirements, to reduce its costs and the financial risk associated with pension provision.

  1. Employee terms and conditions

Universities should consider whether this will be an opportunity to do things differently, or whether the same terms and conditions and policies will be applicable, except for pension, for the staff employed in the subsidiary.  If some staff will remain employed by the university, management and reporting lines between the two employers, contracts, governance documents and policies may need revising to facilitate the arrangement.

  1. TUPE and inter-group services

A transfer of staff and activities from a university to a subsidiary is likely to amount to a TUPE transfer with the associated rights and obligations.  Whilst provision under occupational pension schemes is largely excluded from TUPE, the Pensions Act 2004 requires minimum pension provision following a TUPE transfer.

As the subsidiary will be delivering services to the parent university in this scenario, it is advisable that a carefully drafted inter-group services agreement is put in place.  Drafting can also help avoid an unintentional TUPE transfer of staff from the subsidiary to the university thereby entitling them to membership of TPS / LGPS. 

  1. Equal pay and /or discrimination

There is a risk of an employee relying on the pension clause in their contract with the subsidiary to claim that they receive unequal pay for equal work compared to an employee, who is a different sex, of the university, as an associated employer, with the defined benefit pension provision.  The university would need to demonstrate that the difference was for a material factor which is not sex.  Similarly, an employee could bring a claim for indirect discrimination.

The risk can be mitigated by monitoring the comparative profile of employees in the university and subsidiary and considering an objective justification which could be relied on, beyond cost, if a particular disadvantage is demonstrated or, for an equal pay claim, a material factor is established but is tainted by sex.

  1. Industrial relations

The sector has seen a university renege on its decision to employ staff through a subsidiary and offer a DC scheme following the strength of objection from the unions and employees.  The nature and extent of the objection often depends on each university’s local relationship with its unions and any other changes being proposed.  Irrespective of the local relationship, careful planning and communication is needed to mitigate the risk of industrial unrest derailing implementation.  This should include preparing for the likely criticism that it is creating a two-tier workforce.

We hope that you can join us for our session at 9.30 on 16 May 2024 as part of the UHR conference to discuss this and other cost saving people strategies.

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