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UK Pensions Speedbrief: Fair Deal: Out with the old in with the new

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    08-10-2013

    Summary

    HM Treasury has just issued the new Fair Deal guidance. The new Fair Deal, which is non-statutory policy, sets out the principles that will ensure that staff compulsorily transferred out of the public sector will continue to have access to their existing public service pension scheme. 

    The new guidance is intended to achieve better value for money for the taxpayer by reducing the costs and risks to employers associated with the provision of broadly comparable pension schemes, thereby opening public services up to greater competition.

    The new guidance has immediate effect and applies directly to central government departments, agencies and the NHS as before. Surprisingly, the new guidance also applies to maintained schools (except where they are covered by other arrangements applicable to local government), academies and any other parts of the public sector under the control of government ministers where staff are eligible to be members of a public service scheme.

    Old Fair Deal:  a quick reminder

    The original Fair Deal policy, Staff Transfers from Central Government: A Fair Deal for Staff Pensions (referred to in this Speedbrief as “old Fair Deal”) was published by HM Treasury in June 1999. The approach taken was that where staff were compulsorily transferred from the public sector, their new employer was to give them access to an occupational pension scheme which was broadly comparable to the public service scheme they were leaving. Staff were also to be offered the choice of becoming a deferred member in their former public service scheme or transferring their accrued benefits to the new employer’s broadly comparable scheme under day for day (or equivalent) bulk transfer arrangements.

    New Fair Deal – When Does It Come Into Effect?

    New Fair Deal comes into immediate effect and should be reflected in procurement practice as soon as is practicable without disruption to projects which are already at an advanced stage.

    The necessary changes to public service schemes to accommodate the new Fair Deal guidance are being made (where this is necessary) as soon as practicable. However, if a transfer takes place before a scheme has been able to make the necessary changes to its rules the old Fair Deal policy will continue to apply. As a long stop, the new Fair Deal guidance must be followed in all cases from April 2015.

    Where existing procurements are already at an advanced stage, the contracting authority needs to consider whether it would be legitimate and desirable to adjust the terms of the procurement to take account of new Fair Deal. However, the new guidance should not cause an existing procurement to be terminated or delayed. Where it is not practicable to apply new Fair Deal, the old Fair Deal guidance should continue to apply.

    New Fair Deal – Which Bodies Does It Apply To?

    The new guidance applies to central government departments, agencies and the NHS as before. For the first time, it also extends to maintained schools (except where local authority specific guidance applies), academies and any other parts of the public sector under the control of Government ministers where staff are eligible to be members of a public service scheme.

    The new guidance states that it is also open to contracting authorities in other parts of the public sector to adopt the new Fair Deal principles where new Fair Deal does not directly apply. It is also open to private sector bodies whose staff participate in a public service scheme to seek to adopt a comparable approach.

    Does New Fair Deal Apply to Local Authorities?

    No, local authorities and other best value authorities remain covered by alternative statutory arrangements contained in the Best Value Authorities Staff Transfers (Pensions) Direction 2007. Where employees in maintained schools are employed by the local authority, they will be covered by the Direction rather than Fair Deal.

    It remains to be seen whether there will now be a separate consultation by the Department for Communities and Local Government to amend the Direction to apply the principles of new Fair Deal. However, certain employers within the Local Government Pension Scheme will be subject to new Fair Deal, for example academies.

    New Fair Deal – New Contracts

    New Fair Deal applies when staff who are members of a public service scheme move from the public sector to an independent contractor by way of a transfer to which TUPE applies. It also applies when staff move by way of a non-voluntary transfer to a public service mutual or to other new models of public service delivery (regardless of whether or not TUPE applies).

    Under the new guidance, staff should continue to be members of the public service scheme they were active members of immediately prior to the transfer, subject to the eligibility criteria of that scheme.

    Transferred staff will continue to be eligible to be members of the public service pension scheme provided they remain continuously employed on the delivery of the outsourced service or function. They should also continue to be eligible to be members of the public service pension scheme following any subsequent compulsorily transfer.

    The new guidance also confirms that an employee who was eligible to be a member of the public service scheme prior to the transfer but who was not an active member should continue to be eligible to join the scheme post-transfer. The guidance states that such staff should be enrolled back into the scheme on the day their new employment commences.

    Participation in Public Service Schemes

    New Fair Deal contains further guidance on participating in public service schemes. Unfortunately, however, this guidance is in very general terms and does not provide specific details of the participation terms that schemes such as the NHS Pension Scheme or the Principal Civil Service Pension Scheme will actually offer. This information will be key to understanding how the new Fair Deal guidance will work in practice and what contributions a contractor will be required to pay.

    We assume the details will be made available on a scheme by scheme basis in due course. It seems likely that a Participation Agreement will be required in order to participate. The new guidance envisages that contractors could be charged a differential rate of employer contributions and/or an exit payment where liabilities attributable to the contractor’s participation have not been met by the contributions paid. Contractors may also be required to provide indemnities, bonds or guarantees to participate in the schemes.

    It seems unlikely that participation in public service pension schemes will be risk free for contractors although these risks may be managed through the service contract.

    New Fair Deal and Re-tenders of Contracts Let Under Old Fair Deal

    The principles of new Fair Deal where staff are compulsorily transferred out of the public sector for the first time are relatively straightforward. The complexity will arise where existing contracts let under old Fair Deal come up for re-tender.

    The contracting authority should (where this is compatible with its obligations under the Public Contracts Regulations 2006) require bidders to provide the original protected staff with access to the appropriate public service scheme while they continue to be employed on the re-tendered service. This will be the pension scheme that staff would have been in, had they remained in the public sector.

    Bulk Transfers Back to the Public Service Scheme

    Staff moving back into a public service scheme (or in exceptional circumstances to a new provider’s broadly comparable scheme) will have the option of having their accrued pension rights in the current broadly comparable scheme protected via a bulk transfer arrangement.

    The contracting authority should provide details of the onward bulk transfer terms from the incumbent contractor’s broadly comparable scheme to each of the other bidders in the procurement, along with details of the bulk transfer terms required by the public service scheme in order to provide the required day for day (or equivalent) service credits.

    There may well be a risk that the onward bulk transfer terms are considered insufficient to provide the service credits in the new pension scheme. Bidders should therefore indicate in their bid documentation if they agree to those bulk transfer terms or if any price adjustment is proposed on account of the acceptance of those terms and any resulting shortfall. Where staff elect to transfer their accrued benefits to a public service scheme (or a new provider’s scheme), subject to the contracting authority being satisfied that the bulk transfer arrangements meet the requirements of new Fair Deal, the contracting authority will be required to cover the costs of this shortfall.

    Further details of the bulk transfer requirements can be found in Annex B of the new guidance.

    The new guidance assumes that all existing service contracts will contain clear and enforceable obligations on the incumbent contractor to provide onward bulk transfer terms. In practice, this is not always the case. The new policy appears to add extra complexity and cost to the bid process, requiring bidders to assess bulk transfer shortfalls in a process which is unlikely to directly involve them. The new process hinges upon the timely provision of detailed bulk transfer information and data early in the bid process. It remains to be seen whether contracting authorities will be able to provide this in practice.  

    Comment

    New Fair Deal provides clarity for the position for new contracts and re-tenders of existing contracts. Everyone is now waiting to find out the exact terms on which contractors will participate in each public service pension scheme. As ever, the devil will be in the detail.

    A big shock in the new guidance is that HM Treasury has extended new Fair Deal to apply to maintained schools (including academies) and any other parts of the public sector under the control of Government ministers where staff are eligible to be members of a public service pension scheme. This was not part of the original consultation and it will have significant implications for how these parts of the public sector operate.

    It will also be interesting to see how the process for second generation contracts will work in practice and whether contracting authorities will be able to provide all the necessary bulk transfer information to bidders to allow them to properly price their bids in relation to shortfall risks.

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