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New Fair Deal – A second attempt

  • United Kingdom
  • Pensions - Public sector

12-02-2019

Background 

Back in May 2016, the Ministry of Housing, Communities and Local Government (MHCLG) consulted on a set of proposals intended to give effect to the principles of HM Treasury’s “New Fair Deal” guidance within the local government context. Those proposals would have required all transferred staff to be offered continued access to the LGPS, with the option for contractors to provide a broadly comparable arrangement being removed.

On 19 April 2018, the Government’s response to that consultation confirmed its commitment to introduce the strengthened New Fair Deal principles into the LGPS, but given the number of concerns raised by respondents regarding details of the original proposals, promised to issue a further consultation. MHCLG published that second consultation on 10 January 2019. 

New Fair Deal – mark 2

MHCLG has taken on board many, though not all, of the concerns raised by respondents to the first consultation. Key points to note on the new consultation are:

  • MHCLG remains committed to introducing a form of statutory protection for outsourced employees. This marks a departure from current practice where the legal obligation to maintain membership of the relevant public sector scheme is imposed through the outsourcing contract, in compliance with either the New Fair Deal guidance (for central government) or the Best Value Direction (in the local government sphere). The proposals therefore create a new form of protection which is different from New Fair Deal. 
     
  • There will be a special category of individuals known as “protected transferees”, which will capture any active or eligible LGPS member employed by a “Fair Deal employer” (a new defined term – see below). The status of protected transferee will be retained for as long as the individual is wholly or mainly employed on the delivery of the outsourced service or function, even if the service or function is subsequently sub-contracted or re-tendered. 
     
  • A “Fair Deal employer” is defined as any employer listed in Part 1 or Part 2 of Schedule 2 to the LGPS Regulations 2013, other than a further or higher education corporation, a sixth form corporation or an institution designated under s.129 Education Reform Act 1988. The original proposed inclusion of all employees of admission bodies has been dropped: whilst such bodies will continue to have the option of requiring continued LGPS provision following an outsourcing, they will not have to insist on it. Conversely, the original proposed exclusion of employees of Police & Crime Commissioners has also been dropped, in response to concerns from respondents that such treatment was inconsistent with the approach taken to employees of chief constables (who will be covered). 
     
  • As regards the mechanism for securing continued membership of the LGPS, in addition to the existing option of an admission agreement, a new route will be made available. Under these proposals, the Fair Deal employer will be able to determine that it will act as the deemed employer in respect of the protected transferee (adopting a similar model to that already used for support staff employed within foundation and voluntary schools). MHCLG considers that this will help to reduce the proliferation of participating employers within LGPS, though it acknowledges that in practice, the co-operation of the contractor, as the true legal employer, will still be required for the employee’s LGPS membership to be administered properly. 
     
  • As regards decisions which may result in additional employer costs (eg. ill-health early retirement, flexible retirement, redundancy / business efficiency terminations, award of additional pension), the draft amending regulations provide that these decisions – and the associated costs – must remain with the service provider unless the service contract provides otherwise. 
     
  • There will also be an option for the Fair Deal employer and the service provider to agree that other employees working on the service contract alongside ex-public sector employees should be treated as “protected transferees”, though such agreement can be withdrawn at any time, and apparently with no minimum notice requirement. 
     
  • To address concerns raised during the 2016 consultation, transitional arrangements are included which are designed to provide protection to those ex-public sector staff who have already transferred out to a service provider under the Best Value Direction or its Welsh equivalent, or who transferred before those Directions came into force but would be protected by the Directions on a future onwards transfer. For these staff, protected transferee status is acquired when the contract is re-let to the existing provider or passes to a new service provider. 
     
  • As regards past service rights already held within broadly comparable schemes, the proposal is that these should be handled under the existing regime for individual transfers-in, using standard CETV factors to calculate a CARE service credit on an actuarially neutral basis, but with an obligation on the administering authority to accept the transfer request. In this respect, the proposals diverge from New Fair Deal, which makes express provision for bulk transfers of past service rights on re-tendered contracts. 

Risk-sharing and pass-through   

A significant issue raised in the response to the 2016 consultation related to the need for the LGPS Regulations to make better provision for risk-sharing, also known as pass-through, in relation to outsourcing contracts. The 2019 consultation confirms MHCLG’s views that the deemed employer route (backed up by appropriate service contract provisions, informed by guidance to be issued by the LGPS Scheme Advisory Board) will be the best way of achieving risk-sharing on outsourcing and better value for money for Fair Deal employers. However, for those contracts where the admission agreement route is adopted, MHCLG is also proposing to confirm that risk-sharing provisions may be included in the admission agreement. 

Merger or takeover of a Scheme employer 

The proposals in the consultation also cover a stand-alone issue relating to the pension consequences of a merger or takeover of a Scheme employer (for example, a merger of two further education colleges). The changes here are intended to provide for an automatic transfer of the pensions liabilities to the successor organisation, which would then be treated as the Scheme employer in relation to both the active members and deferred / pensioner members of the exiting employer, with corresponding provision for an inter-fund transfer where the successor organisation participates in a different fund. It is not wholly clear from the draft regulations and the consultation paper whether this proposal is intended to prevent an unintentional exit payment being triggered in such circumstances, or whether the concern is simply to ensure that the liability to make the exit payment can be enforced against the successor organisation, which now has the assets of the exiting employer.

Comment 

MHCLG clearly remains committed to strengthening pensions protection through offering continued access to the LGPS and it is encouraging to note that this second consultation addresses a number of the more significant concerns raised in response to the first consultation. 

In particular, by excluding admission bodies and further / higher education sector employers, the new definition of Fair Deal employer goes some way towards allaying concerns regarding the significantly increased numbers of employers who would otherwise have become caught by the scope of the New Fair Deal principles under the original proposals. However, while the tenor of the consultation in relation to risk-sharing may appease some contractors, the proposed amendments may not go far enough to overcome the current difficulties with implementing pass-through arrangements within the rather rigid framework of the LGPS Regulations. Realistically, too, it is unlikely that extension of the “deemed employer” option will provide a magic solution to the administrative and other issues arising from the steadily increasing number of participating employers which LGPS funds are needing to manage as a result of public sector outsourcing.  

The consultation closes on Thursday 4th April. Eversheds Sutherland will be submitting a full response to the consultation.

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