Summary and implications

In July 2012, the Government confirmed that it would be retaining the Fair Deal pension protection policy in relation to public-sector staff, but allowing access to all the public-sector pension schemes for all staff transferred out of the public sector to an external provider. In November 2012, the Government published a response to a consultation launched in March 2011 on this proposed change and issued a new draft Fair Deal policy.

This new policy promises a simpler, cheaper and less risky approach for the provision of public-sector pension benefits by contractors providing NHS services.

The current Fair Deal policy

The Fair Deal policy applies to pension provision when public-sector employees are compulsorily transferred to a non-public-sector employer as part of an outsourcing project. Where the employees cannot remain members of the public-sector scheme, Fair Deal requires their new non-public-sector employer to provide access to a pension scheme which is broadly comparable to the public-sector pension scheme from which they are transferring. Employees also have to be given the right to transfer their accrued pension benefits into any replacement scheme.

Fair Deal is particularly relevant for NHS outsourcing as it is very difficult for transferring staff to remain members of the NHS Pension Scheme if their new employer is in the private sector. Currently, the general position is that private companies without very strong links to the NHS (e.g. through ownership by GPs) cannot participate in the NHS Pension Scheme, so contractors are more often than not obliged to provide access to a broadly comparable scheme for transferring staff. This can be contrasted with the Local Government Pension Scheme which allows some non-public-sector bodies to join it so transferring staff can continue their membership.

The cost of this difference is significant for those contractors providing NHS services. Broadly the cost of contributing directly to the NHS Pension Scheme is around 14 per cent of payroll whereas for a broadly comparable scheme it can be up to 40 per cent of payroll.

Amending Fair Deal – widening contractor access to public service pension schemes

Under the proposed new Fair Deal policy, all staff whose employment is compulsorily transferred under TUPE from a public-sector employer to an independent provider of public services will be able to retain membership of their current employer’s pension arrangements including the NHS Pension Scheme. The current requirement to provide broadly comparable pension arrangements and offer bulk transfer will no longer apply. This should reduce the pension costs for contractors.

Contractors will therefore be required to make employer contributions to the NHS Pension Scheme – as will employees.

Under the new policy, on second generation transfers (i.e. retendered contracts) involving employees covered by the existing Fair Deal policy, contractors will have the option of providing access to a public service scheme or continuing to provide a broadly comparable scheme.

The Government has also proposed that from 2015, broadly comparable schemes will be able to provide benefits on a career average or “CARE” basis in line with wider public-sector pension reforms.

Risk sharing: does the new policy strike the right balance?

This policy change will clearly benefit private-sector contractors as it will significantly reduce the cost and risk of having to provide NHS style pension benefits in a separate broadly comparable scheme.

The change to Fair Deal is part of the Coalition Government’s aim to promote competition and create a more open market for the delivery of NHS services. The Department of Health has acknowledged previously that the cost of providing public-sector style pensions does currently leave private-sector providers disadvantaged as their transferred staff are unable to access the NHS scheme, requiring the provider to incur significant cost in matching the NHS pension benefits in a broadly comparable scheme. The Government also acknowledged in the consultation response that the cost and risks of having to provide a broadly comparable (final-salary) scheme are seen as a deterrent to organisations bidding for contracts, especially amongst smaller firms.

Despite the potential benefits and saving for contractors, concern has been raised about the long term risk for the Government and taxpayers of allowing private contractors’ access to the NHS Pension Scheme. Lord Hutton, in his 2011 report on the future of public-sector pensions, was of the view that there are clear disadvantages to widening access to any public-sector scheme as the Government will be at risk from the financial consequences of those organisations failing or being unable to fund the liabilities that their members accrue. Despite this, however, the Government has concluded that the new approach to Fair Deal will ensure that risk is shared appropriately between employers, scheme members and taxpayers – perhaps indicating that opening barriers to the provision of NHS services is a more pressing concern than the consequences of contractor insolvency.

Scheme specific mechanisms for the implementation of the new policy will be decided by each scheme subject to HM Treasury consent. So it remains to be seen whether the NHS Pension Scheme will require contractors to provide a bond or other type of security to cover their liabilities to the Scheme as a term of participation. This could be one approach used to protect the Government and taxpayer from the risk of contractor insolvency, but would also increase cost for the contractor in providing it.

No start date for the new policy has been announced and the current Fair Deal will remain in force until the new policy is formally introduced.