UK: New Fair Deal

Last Updated: 16 February 2014
Article by Anne-Marie Winton and Sharon Piert

HM Treasury published the long-awaited "Fair Deal for staff pensions: staff transfer from central government" guidance in October 2013 (New Fair Deal). New Fair Deal provides pension protection to staff who transfer from the public to the private sector. The key change in New Fair Deal is that employees who compulsorily transfer out of the public sector must be offered continued access to the relevant public service pension scheme (Relevant Scheme) of which they were a member or eligible to join prior to the transfer. This Clarity Guide explores the key features and requirements included in New Fair Deal.

BACKGROUND

The "Staff Transfers from Central Government: A Fair Deal for Staff Pensions" was first published in June 1999 and further supplementary guidance was issued in June 2004 (Old Fair Deal). It was designed to protect the public sector pension benefits of staff who were compulsorily transferred into the private sector as part of an outsourcing arrangement. Under Old Fair Deal, the new employer of staff who were compulsorily TUPE transferred from the public sector had to provide access to a 'broadly comparable' occupational pension scheme to the public sector one the employees were leaving.

The cost of establishing and/or administering a 'broadly comparable' scheme often prevented potential contractors from bidding for outsourcing work. But New Fair Deal allows contractors access to the Relevant Scheme, so hopefully the outsourcing market will open up and contractors will bid for outsourcing work which would previously have been uneconomical.

FRAMEWORK

When is it effective? New Fair Deal came into effect in October 2013 and should apply to all future outsourcing contracts. However, in practice, changes still need to be made to the Relevant Schemes to allow any contractor access, so timing is a bit of a grey area. Where a procurement exercise is at an advanced stage, the contracting authority should consider whether it would be "legitimate and desirable" to implement New Fair Deal and, if not, Old Fair Deal will apply and there may be some exceptional circumstances where continued access to a Relevant Scheme will not be possible and the contractor should comply with Old Fair Deal instead. However, the strength of those reasons should be tested and recognised trade unions or, in the absence of such a body, staff should be consulted.

Who does it apply to? New Fair Deal applies directly to central government departments, agencies, the NHS, maintained schools (including academies) and other parts of the public sector under the control of Government ministers where staff are eligible to be members of a Relevant Scheme. It also applies to any subsequent compulsory transfer of employment. It does not, however, apply to "best value authorities" (defined in the Local Government Act 1999) who are subject to the Best Value Authorities Staff Transfers (Pensions) Direction 2007, nor does it apply to new employees who did not transfer from the public sector.

If an employee no longer satisfies this eligibility criteria, they would become a deferred member of the Relevant Scheme. New Fair Deal states that if an employee moves from full-time to part-time employment, or otherwise reduces the proportion of their time employed on the transferred service or function so that they are no longer "wholly or mainly employed", they will continue to be eligible to be a member of the Relevant Scheme to the extent that the transferred employment continues. We think this means that only the proportion of time that the employee remains carrying out the service would be pensionable.

First Generation Transfers: New Fair Deal applies to transferring public sector employees who are or eligible to become members of a Relevant Scheme and move:

  • from the public sector to a contractor as a result of a TUPE transfer; or
  • by way of a non-voluntary transfer to a public service mutual (i.e. an organisation that has left the public sector but continues to deliver public services) or to other new models of public service delivery, regardless of whether TUPE applies.

Such staff will be allowed to continue as members of the Relevant Scheme they were in immediately prior to the transfer. Those eligible to join but not members of the Relevant Scheme on transfer will continue to be eligible on the same terms.

Second Generation Transfers: When a contract is retendered, New Fair Deal should apply and bidders are expected to offer staff access to the Relevant Scheme as part of their bid (this should be the Relevant Scheme which the employees were members of before their original transfer).

In some instances, bidders may be allowed to provide a broadly comparable scheme instead, e.g. when the incumbent contractor has a contractual obligation to offer a 'broadly comparable' scheme or this must be done under procurement law to prevent the contracting authority from treating bidders unequally.

PRACTICAL REQUIREMENTS

New Fair Deal states that pensions should be dealt with as an integral part of the overall procurement exercise, and contracting authorities should make clear at an early stage what pension protection is required, in both first generation and subsequent outsourcings. Contracting authorities should confirm at an early stage that bidders are willing to comply with the regulations governing the Relevant Scheme (which in due course will be amended to reflect New Fair Deal).

The contracting authority should also notify the managers of the Relevant Scheme during the procurement process that staff may be transferred to a contractor who will need to participate in the Relevant Scheme in order to provide those staff with continued access to that scheme. The contractor will be required to enter into a Participation Agreement with that responsible authority, which together with regulations will specify how New Fair Deal will operate in respect of a contract and the contract must require the contractor to comply with the Participation Agreement.

The contracting authority should provide the managers of the Relevant Scheme with the names of the staff transferring to the contractor who will retain (or be eligible for) membership of it.

Eligibility: Staff who were eligible to participate in a Relevant Scheme immediately prior to the transfer should be automatically enrolled into the Relevant Scheme on the day the new employment commences. When pricing a bid, bidders should consider that the number of employees participating in the scheme post transfer may increase due to this automatic enrolment.

Contributions: The contractor's staff will pay the same employee contributions as other members of the Relevant Scheme. The contractor's contributions will normally be the same rate as other participating employers. But the rate of employer contributions may change following an actuarial valuation. New Fair Deal also permits different rates of employer contributions to take account of any higher risk of default associated with an employer.

The managers of the Relevant Scheme will specify the information that contractors are required to provide in order to participate. This is necessary to ensure that the Relevant Scheme's internal controls are operated effectively and to enable the responsible authority to manage and administer the Relevant Scheme in compliance with its statutory responsibilities. This will include an obligation on the contractor to notify the Relevant Scheme when an employee is no longer eligible to be a member of the Relevant Scheme in respect of some or all of their employment.

PENSION RISK ALLOCATION

The contracting authority and contractor may wish to agree in advance that the contracting authority will provide more or less funding (as appropriate) if employer contribution rates change following a valuation. This means the contractor does not need to price for the risk of increased employer contributions.

New Fair Deal also allows the contracting authority to require any savings in employer contributions because staff no longer work on the contract, or otherwise cease to participate in the Relevant Scheme, to be paid to it.

Contractors may be required to provide indemnities, such as a guarantee or bond to protect the Relevant Scheme from potential costs arising from their participation. For example, a bond may be required to cover any contributions owed in the event of the contractor's insolvency.

Participation Agreements may set out responsibility for any additional costs arising from early termination of employment, employer decisions, the exercise of employer discretions, or any other matter that may give rise to additional costs. The contractors may be required to meet such additional costs.

Where the Relevant Scheme is unfunded it is difficult to see conceptually how an exit debt on termination of the contract could arise. However, the contract may include risk allocation analogous to how Regulation 38 debts of the LGPS Administration Regulations 2008 are dealt with.

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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