The Department for Communities and Local Government 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.
In addition, the consultation paper proposes various other changes to the regulations governing the 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 savings access to some of the new pensions flexibilities introduced from 6 April 2015.
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).
The two exceptions to this are:
- 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.
- Where the new employer is what is commonly known as a “Part 2” or “designation” employer (essentially, a sub-category of LGPS employers, such as Transport for London or companies controlled by local authorities, who can choose which employees to “designate” as eligible for LGPS membership). In this case, rather than entering into an admission agreement, the new employer must instead designate the protected transferees as being eligible for LGPS.
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.
The most material of the other proposed changes are as follows:
- AVCs – the member will (in broad terms) be given the choice of applying any AVCs under the LGPS to provide any of the following forms of benefit: a pension commencement lump sum; one or more uncrystallised funds pension lump sums; annuity purchase from an external provider; or purchase of additional pension under the LGPS. Alternatively, the member can opt to transfer the AVCs out to another registered pension scheme (eg. to take advantage of flexi-access drawdown)
- Deferred members rejoining – where a member leaves the scheme and later re-joins, the member will have 12 months in which to opt to aggregate his deferred benefits with his new active member account. This is a return to the model which applied under the 2008 LGPS regulations.
- Employer consent to early retirement between ages 55 and 60 will be removed for members with deferred benefits built up under the 2008 scheme, on the basis that these benefits will by default be actuarially reduced (and so early retirement is cost-neutral).
- The requirement for admission agreements to be notified to the Secretary of State will be removed; instead, there will be a requirement for the administering authority to publish a list of all admission agreements entered into. This will include existing admission agreements in force at the date the changes come into force, though a 12-month transitional period will be allowed for compiling and publication of these lists.
- The regulations will expressly confirm that an admission agreement can be entered into with retrospective effect – a point which will be helpful in ensuring that pension issues do not unduly delay contract tendering processes.
- Where a surplus is revealed on an exit valuation, the administering authority will have to pay this to the exiting employer. This is no doubt intended to ensure that employers (particularly admission bodies) can reasonably be required by administering authorities to fund their liabilities generously, since the new provisions will remove the risk that a “trapped surplus” will arise which would be lost to the employer on leaving the scheme.
The consultation runs until 20 August 2016.
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.
For example, community admission bodies outsourcing services could find themselves caught by these provisions where the transfer involves staff who are currently eligible for LGPS, even if the outsourced service has no connection with a public sector contract. This is because there appears to be no attempt made in the draft provisions to distinguish between employees of admission bodies who were originally public sector employees and those new hires who have been offered terms which included access to LGPS benefits: all would seem to count as “protected transferees”.
Similarly, 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, with a view to providing comments on any areas of concern ahead of the consultation deadline. 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.