University Financial Resilience: Using subsidiaries for pension provision

UCEA and UUK have recently 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.

For several years, Mills & Reeve LLP has been advising a number of post-92 universities on the establishment of subsidiary companies for alternative defined contribution (DC) pension provision. 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 universities considering this 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.

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.

2.         Employee terms and conditions

A university should consider whether this will be used as an opportunity to do things differently or 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.

3.         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.  Whilst provision under occupational pension schemes is largely excluded from TUPE, the Pensions Act 2004 requires minimum pension provision following a TUPE transfer.

A university and subsidiary will need to provide certain written information to the employee representatives of all its “affected employees” long enough before the transfer. Changes to pension arrangements are likely to be "measures" requiring consultation, despite the fact that rights relating to occupational pension schemes largely do not 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. 

4.         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 profile of 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. 

5.         Industrial relations

The sector has seen a university renege on its decision to employ staff through a subsidiary and offer a defined contribution 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 are also advising universities on a number of related issues including university governance, compliance with OfS conditions and reporting requirements, UKVI, tax, charitable status and data compliance.

Please get in touch if we can assist you.

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Every piece of content we create is correct on the date it’s published but please don’t rely on it as legal advice. If you’d like to speak to us about your own legal requirements, please contact one of our expert lawyers.

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