UK: Public Sector Outsourcing – Update

Last Updated: 6 July 2012
Article by Justin McGilloway

On 10 March 2011 the Independent Public Service Pensions Commission (the "Hutton Commission") led by Lord Hutton published its final report on pension provision for public sector employees. Key amongst the report's suggested reforms was the recommended move from final salary schemes to career average schemes whilst retaining the link to defined benefits.

At first glance the Hutton Commission's proposals would not seem to have much effect on private contractors but read on to find out why this is not necessarily the case.

Existing protection for transferring public-sector employees 

  • Fair Deal 1999 & 2004

Back in 1999 the Labour Government introduced the non-statutory Fair Deal Policy (the "FDP") setting out the way it wanted outsourcing public-sector bodies to deal with pensions of staff transferring to private-sector employment. Fair Deal 2004 supplements the FDP but not to any material degree. FDP requires that the transferring employees acquire "broadly comparable" pension benefits for future service in the private sector.

A private contractor can achieve "broad comparability" in one of three ways:

  • obtaining a certificate/ passport from the Government Actuaries Department ("GAD") in relation to the contractor's existing scheme;
  • becoming an "admitted body" and contributing to the transferring employees' existing public sector scheme; or
  • paying into a third party GAD approved scheme.

There are competing cost and control implications which a private contractor will need to consider in choosing which option to implement. In addition, where the public-sector body is classified as a "best value authority" there may be further implications.

  • Best Value Direction 20071 ("BVD")

In addition to FDP, "best value authorities" entering into outsourcing agreements from 1 October 2007 are required under BVD to include provision for pension protection in their outsourcing agreements for those employees compulsorily transferring under TUPE. Best value authorities are widely defined and unlike the FDP, the BVD imposes statutory obligations on the outsourcing best value authority although not the private contractor.

Under BVD, the best value authority is required to ensure that the outsourcing contract contains an express term requiring the private contractor to secure broadly equivalent pension benefits for the transferring employees. In addition, the authority must ensure that those employees can directly enforce the pension protection provision against the private contractor under the outsourcing agreement. Under BVD, the best value authority is required to ensure that the outsourcing contract contains an express term requiring the private contractor to secure broadly equivalent pension benefits for the transferring employees. In addition, the authority must ensure that those employees can directly enforce the pension protection provision against the private contractor under the outsourcing agreement.

Consultation on Fair Deal Policy

On 3 March 2011 the Government initiated a Consultation on the future of the FDP. The consultation recognised the findings of the Hutton Commission that the FDP acted as a barrier to government outsourcing and thus the efficiencies and innovation which private sector contractors might bring to public sector service delivery.

The Government's response to the Consultation is now overdue and it is expected to be released in the next few months. The response will be of critical importance to private contractors as the underlying profitability of bidding for and taking on outsourcing contracts will be influenced by the level of pension provision that a private contractor will be required to make.

The Government's most recent indications given by Danny Alexander in his December 2011 statement to the House of Commons suggest that the FDP will be retained in some form although the risks of defined benefit schemes will no longer be transferred to the private contractor. Quite how this will work in practice will only emerge from the full Government response.

Changes to Employee Contributions

On 21 December 2011 GAD issued a note advising (at that time) of upcoming changes to certain public sector employee contribution rates from April 2012. Private contractors can benefit from the consequent cost savings in relation to new outsourcing contracts by incorporating those revised rates into design of their broadly comparable schemes.

However, private contractors can only do so where the relevant Government consultation has ended and a response has been issued. Schemes which have been cleared for increased employee contributions include the Principal Civil Service Pension Scheme, the National Health Pension Scheme (England & Wales) and the Teachers' Pension Schemes (England & Wales).

Following the Local Government Association's announcement on 31 May 2012 it seems that increased employee contributions will not be applied to members of the Local Government Pension Scheme ("LGPS"). Subject to a further round of consultation, draft regulations will be implemented to introduce a new career average LGPS scheme from 1 April 2014.


We await the Government's response as to the future of FDP.

In the meantime, private contractors bidding on new outsourcing projects would be well advised to see whether they can substitute revised employee contribution levels into their broadly comparable scheme designs where the employees are transferring from public sector schemes which have been cleared for increased employee contributions.


1. Best Value Authorities Staff Transfers (Pensions) Direction 2007

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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