Précis

The Department for Communities and Local Government (“DCLG”) has recently revealed long-awaited draft provisions which are intended to give effect, within the local government sector, to the principles set out for central government bodies in HM Treasury’s “New Fair Deal” guidance from October 2013. For contractors involved with local authority outsourcing contracts (whether you are providing services under an existing contract or bidding for a contract) this article will be of interest to you.

What?

Draft provisions to give effect to the principles set out for central government bodies in HM Treasury’s “New Fair Deal” guidance from October 2013 have been revealed, along with the consultation paper which proposes various other changes to the regulations governing the local government pension schemes (“LGPS”), most of which are aimed at tidying up drafting problems which have become apparent since those regulations came into force on 1 April 2014. There are also changes which are designed to give LGPS members with AVC (additional voluntary contribution) savings access to some of the new pensions flexibilities introduced from 6 April 2015.

(link: https://www.gov.uk/government/consultations/local-government-pension-scheme-regulations )

So What?

Consultation ended on 20 August 2016 and we await the Government’s response. In the meantime, existing and prospective contractors involved in public sector outsourcing would do well to review the details of the proposals, noting in particular, with the exception of the tweaks which will allow the refund of a surplus on termination, the risks of participating in the LGPS under an admission agreement remain unchanged.

Background

The original Fair Deal guidance was first introduced in 1999 in order to ensure a minimum level of pension protection for staff transferring from central government to private sector contractors as a result of outsourcing of services. A similar (but not identical) set of provisions was then applied to local authorities and other “best value” authorities in the Best Value Authorities Staff Transfers (Pensions) Direction 2007, which has statutory force.

The approach adopted under both the original Fair Deal guidance and the Best Value Direction required the private sector contractor to provide a broadly comparable pension scheme for transferring staff. However, under the 2013 New Fair Deal guidance, HM Treasury opted for a model under which transferring staff should normally be given continued access to their public service pension scheme after the transfer of their employment. Likewise, staff who have already transferred out to a broadly comparable scheme under the old Fair Deal provisions should be returned to their former public service scheme (or nearest equivalent) when an existing contract is retendered.

All the main central government schemes, including the NHS Pension Scheme, the Teachers’ Pension Scheme and the Principal Civil Service Pension Scheme, have now been amended to reflect New Fair Deal principles. However, in the local government sector, the LGPS Regulations have yet to be updated, and therefore the Best Value Direction currently continues to apply.

The proposals – New Fair Deal

As anticipated, DCLG is proposing to use the existing admission agreement mechanism in order to implement New Fair Deal, and the Best Value Direction will, in due course, be revoked.

The proposals define a new category of employee, known as a “protected transferee”. Where New Fair Deal applies on a first transfer of protected transferees from local government employment, the new employer will in most cases be required to enter into an admission agreement (rather than this being, as at present, just one of the possible routes which could be used to satisfy the Best Value Direction requirements).

There are two exceptions to this, one of which is relevant to contractors. Where the new employer participates in another public service pension scheme. In this case, DCLG presumably expects that the protected transferees will instead be offered membership of that other scheme. An example of this might be if an employee currently participating in LGPS were to be transferred to a NHS body.

Conversely, on a re-tender which involves staff who have already transferred out to a broadly comparable scheme, the proposal is that neither the incumbent contractor (if bidding for the re-tendered contract) nor any other bidder should be required to obtain admission to LGPS for the purposes of the new contract, though they will be able to opt to do so. It seems that the primary concern lying behind this deviation from the New Fair Deal requirements is the difficulty of legislating for a “forced” bulk transfer of accrued rights from the broadly comparable scheme into LGPS.

It is also noteworthy that a “protected transferee” will include not just employees of core LGPS employers, such as local authorities, but also employees of the majority of other LGPS employers, including existing admission bodies (which are not necessarily covered either by New Fair Deal or the Best Value Direction). Similarly, any sub-contracting by the employer of a protected transferee will trigger the new provisions. Employees of certain LGPS employers which are outside the scope of New Fair Deal (including higher and further education institutions and Police and Crime Commissioners) will not be covered by the new provisions.

Comment

There are a number of respects in which the draft provisions do not align fully with the New Fair Deal guidance. In particular, the draft provisions significantly extend protection to cover employers not currently covered by either New Fair Deal or the Best Value Direction.

New Fair Deal views the possibility of staff not being kept in (or returned to) their relevant public service pension scheme as being very much an exceptional case, whereas it is foreseeable under these new provisions that on first generation transfers, protected transferees could join another public service pension scheme. Also, retenders involving staff who are currently in a broadly comparable scheme are not specifically addressed by the draft provisions, which potentially leaves it open to all bidders to offer broadly comparable schemes rather than access to LGPS.

It will be interesting to see whether these kinds of issues survive the consultation process. In the meantime, existing and prospective contractors involved in public sector outsourcing would do well to review the details of the proposals, noting in particular, with the exception of the tweaks which will allow the refund of a surplus on termination, the proposal does not cover the risks of participating in the LGPS under an admission agreement.