The long anticipated changes to the Government’s Fair Deal policy are still to materialise with any degree of clarity, but what is certain is that the current policy, which the Independent Public Service Pensions Commission identified back in 2011 as creating “a barrier to the plurality of public service provision” is set for significant overhaul. So how are things set to change and where does this leave commissioning authorities and contractors with regard to existing or forthcoming procurement exercises?

Existing “Fair Deal”

Originally introduced in 1999, “Fair Deal” is a non-statutory policy relevant to pension provision for public sector employees when they are the subject of a compulsory transfer to the private sector employer. Supplemented in 2004, the policy states that the commissioning authority must contractually require that the private sector contractor:

  • Provides access to a “broadly comparable” pension scheme for those transferred staff (thereby providing protection for future pension rights)
  • Affords transferring staff the option of transferring their accrued benefits from the public-sector scheme (often referred to as a ”bulk transfer option”), thereby affording them the opportunity to preserve the link between benefits and final salary for all accrued service

The protection of future pension rights is currently achieved by the contractor either providing access to its own ”broadly comparable” pension scheme or by securing participation in the relevant public sector scheme in which transferring employees currently enjoy membership.

Under present rules, only the Local Government Pension Scheme and, in limited circumstances, the NHS Pension Scheme allow participation for private sector contractors. Where the contractor is not eligible to participate or otherwise elects to offer its own “broadly comparable” scheme to transferring employees, it has to give those employees the option of transferring their accrued rights as part of a bulk transfer arrangement. These requirements have often been lamented as being particularly onerous, time consuming and disproportionate, particularly where take up amongst employees is low. Issues of where liability should rest for meeting the cost of shortfalls in actuarial valuations, calculated by the respective actuaries of the contracting parties, are often a cause for debate going to the root of contract pricing.

Overall, the existing approach has significant cost implications for private contractors, and has arguably stifled development of efficiencies and innovation which private sector contractors can bring to public sector delivery and even deterred potential bidders.

Future ‘Fair Deal’ – a good deal fairer?

In July 2012,The Chief Secretary to the Treasury stated:

“I can also confirm that the Government has reviewed the Fair Deal policy and has agreed to maintain the overall approach, but deliver this by offering access to public sector schemes for transferring staff. When implemented, this means that all staff whose employment is compulsorily transferred from the public sector under TUPE, including subsequent TUPE transfers, to independent providers of public services will retain membership of their current employer’s pension arrangements. These arrangements will replace the current broad comparability and bulk transfer approach under Fair Deal, which will no longer apply”.

So, the forthcoming changes are likely to centre around the creation of an environment whereby public sector staff whose employment is the subject of a compulsory transfer can retain membership of the relevant public sector pension scheme. Allowing continued membership, with the minimum disruption that comes with it, should simplify matters. Similarly, if employees remain in the public sector scheme, there is no need for bulk transfer arrangements between schemes. Its easy to see how, in theory, the proposals would reduce both the administrative and financial burden on both parties.

Feedback on the proposals has broadly welcomed the approach of extending access to public sector schemes in this way. Greater adoption of “pass through” arrangements (whereby the outsourcing authority retain some or all of the pensions risk) was identified as a method by which Fair Deal objectives could be achieved while levelling the playing field between different types of bidder. This was a particularly prevalent view amongst those championing greater access to the NHS Pension Scheme. Providers who are outside of the “NHS Family” (and therefore with no right to access the NHS Pension Scheme) were often out-bid when compared with those who were entitled to participate.

However, one area which bidders will be particularly keen to see addressed, is whether there will be suitable safeguards put in place so that they won’t be left nursing the headache of managing the risks of uncontrollable and spiralling costs arising through membership of the public sector scheme in which they participate. Having just got rid of the burden of managing deficits accruing in expensive "broadly comparable" schemes.

So, what about the here and now?

So where does this period of ”limbo”, while the Government sets it policy in stone, leave private contractors and public sector authorities? What about contracts that are currently out to tender, imminent or even in the process of being negotiated, perhaps where those contracts will have an effective date prior to the date on which policy changes become effective? The parties are left following the existing principles of Fair Deal knowing that they are set to change and that is a difficult proposition. Several points spring to mind. For example:

  • Current uncertainty may deter bidders from responding to tenders until the position is clarified or mean that they require additional comfort in terms of the contract price
  • Bidders may want to introduce flexibility in their negotiations so that they have the option to participate in the public-sector scheme (assuming they can) when the staff actually transfer under the contract
  • Will a contractor be expected (and indeed prepared) to make temporary provision for a “broadly comparable” scheme for a interim period, knowing that access to the public sector scheme will be permissible in the near future. The cost implications of this could be significant and is that really cost-efficient?
  • Bidders may seek to reserve the right to amend their contract pricing or the overall pensions offering until the situation has been clarified
  • How should the parties address those employees who are the subject of so called “second generation transfers”. Should they be afforded the ability to rejoin the public sector scheme which they were historically a member of?

Conclusions

Announcements to date are very thin on detail and for the moment contractors and commissioners alike are left with many unanswered questions. However, contractors who are currently left managing pension deficits accrued as a result of previous outsourcings will no doubt welcome alternative approaches aimed at producing a more level playing field. Offering wider access to schemes, such as the NHS Pension Scheme, will potentially open up the market to a greater number of private sector bidders for NHS contracts, and mean that NHS in-house bidders and members of the “NHS Family” will need to sharpen their pencils.