The Treasury has now published the long-awaited response to the Fair Deal consultation launched in March 2011.

The response document, which is available online, sets out more detail on the Government's position in relation to offering access to the public service pension schemes for all transferring staff and summarises the responses to the consultation questions.

Draft guidance on the New Fair Deal is given, providing more detail on how the Government's preferred approach will work in practice.

The Government is consulting further on how to treat employees who have been compulsorily transferred out of the public sector under the existing Fair Deal, and whose contracts are re-tendered under New Fair Deal.

The future of Fair Deal

The Government announced on 4 July 2012 that the overall approach to Fair Deal would be maintained but in future this will be delivered by offering access to the public service pension schemes for compulsorily transferred staff. It believes that this option will provide an appropriate balance between maintaining protection for transferred employees, providing better value for money for the taxpayer and reducing barriers to the plurality of public service provision.

The mechanisms that will be needed to implement New Fair Deal are still being considered by the Government, including how the employer contribution rates will be set. Therefore Existing Fair Deal will continue to apply until a start date for New Fair Deal is announced.

The New Fair Deal - draft guidance

The response document includes draft guidance on New Fair Deal. The headlines of this guidance are set out below:

Newly transferred staff

  • New Fair Deal will apply in the same circumstances as the Existing Fair Deal.
  • Staff whose employment is compulsorily transferred from a public sector employer under TUPE to independent providers of public services will be able to retain membership of their current employer's pension arrangements. This is a radical change to process and means that the unfunded schemes, such as the NHS Pension Scheme and the Principal Civil Service Pension Scheme will be opened up. Participation in such schemes has only previously been possible in very limited circumstances. This will replace the current requirement to provide broadly comparable pensions and offer bulk transfer terms.
  • The process for determining employer contributions will be decided on a scheme-by-scheme basis. Further details of the mechanism are to follow, but it is stated that generally the employer contributions will reflect the employer contribution rate paid by the public sector employers. The contribution rate may vary over the lifetime of the contract according to periodic scheme valuations. The draft guidance does not, at this stage, include provisions in relation to costs payable on exit from the schemes.
  • The relevant scheme administrator will set out the circumstances in which transferred staff will stop receiving access to the public service pension scheme. This could be when staff stop working on the contract that they transferred in relation to, or if they voluntarily move to a different role with new terms and conditions.
  • The Department for Communities and Local Government is to consider the impact of New Fair Deal in view of the Best Value Authorities Staff Transfers (Pensions) Direction 2007 and admitted body status in the LGPS. Transfers from Local Government and other Best Value Authorities will continue to be covered by the Direction until such time as this is repealed or amended.

Contracts under Existing Fair Deal that are re-tendered under New Fair Deal

  • Employers have the choice of either providing employees with access to a public service pension scheme or providing a broadly comparable scheme. They must decide on one option for all transferring employees.
  • The scheme will be broadly comparable to that currently available to employees in the public sector. After 2015 this is likely to be a CARE scheme but employers will be required to provide transitional protection to employees closest to retirement. This is a significant move away from the requirement under Existing Fair Deal for broad comparability to be pinned to the date of transfer.
  • New Fair Deal will only apply to contracts to which Existing Fair Deal applied and which have been re-tendered e.g. contracts originally let pre-1999 will not be covered.
  • New Fair Deal will apply only to active members of the broadly comparable scheme at the date of transfer and not to those who have 'turned down their Fair Deal entitlement'.

Future accrual for workers who are re-admitted back into the public service pension scheme

  • The Government's objective is for those employees who are given access to the public service pension schemes, and who on 1 April 2012 have less than 10 years until their Normal Pension Age (NPA), to receive transitional protection. Employees that have 13.5 or 14 years until their NPA will be subject to tapering protection.
  • Employees will join the scheme most appropriate to their employment; this will be determined by the scheme manager. For employees with transitional protection this will, for most, be the same scheme that they left. For employees without transitional protection, this may not be the same scheme that they left.

Treatment of accrued rights and the operation of bulk transfers

  • Staff moving back to the public service schemes will have their accrued rights protected via a bulk transfer arrangement. This will require a transfer payment to be made by the outgoing employer/trustee of the relevant broadly comparable scheme to the receiving public service pension scheme. This is intended to tie in with the requirement under Existing Fair Deal for an onward bulk transfer on no less favourable terms than the initial bulk transfer into the comparable scheme.
  • The relevant public service scheme will set out the bulk transfer terms required to allow transferred staff to secure credit for their past service in the public service pension scheme on a day-for-day basis.
  • If the onward bulk transfer is insufficient to cover the new liabilities, the cost in compensating for any shortfall lies with the contracting authority, as is the position under Existing Fair Deal.

Who does New Fair Deal NOT apply to?

  • Staff transferred out prior to 1999 (unless the contracting authority decides, having made a value for money case, to apply it to a re-tendering).
  • Staff transferred within the public sector (machinery of government transfers).
  • Transfers between independent providers, unless those staff originally transferred from the public sector under Fair Deal protection.

Further consultation

The Government believes that Existing Fair Deal in relation to re-tenders of contracts is not attractive to independent providers due to the high costs of providing final salary pension.

The Government believes policy objectives are best met by offering employers the choice of either providing a broadly comparable CARE scheme or providing access to the public service pension scheme.

The proposed approach is set out in more detail above, as taken from the draft guidance. The Government has posed six further consultation questions to look specifically at how re-tenders of contracts covered by Existing Fair Deal should be handled and to invite views on the draft guidance more generally.

Implications for contracting authorities and providers

The deadline for responses to the further consultation questions is February 2013. We do not expect New Fair Deal to be finalised until at least spring 2013, in line with the progression of the Public Service Pensions Bill.

In the meantime, the following significant changes are now clear:

  • participation in the unfunded public service pension schemes will be opened up to private and third sector providers, to allow transferred employees to retain membership of their previous employers' pension scheme;
  • there will be no broadly comparable schemes or bulk transfers for new transferees from the public sector; and
  • broadly comparable schemes for employees who transfer in connection with the re-let of an Existing Fair Deal contract will track changes to the public service pension schemes.

However, big questions still remain around the mechanisms for participation, including how contribution rates and any other associated costs will be fixed, and exactly how re-tenders should be handled.

Our advice to contracting authorities and to private sector bidders is to consider variant bids in relation to pensions, to cover both the costs associated with complying with Existing Fair Deal and the likely costs associated with complying with New Fair Deal (with flexibility to revisit the proposal once the details of New Fair Deal are finalised).