UK: Fair Deal: A New Challenge

Last Updated: 1 July 2015
Article by John Hanratty

Summary and implications

  • Old Fair Deal outsourcing contracts with public authorities may contain restrictions which mean changing broadly comparable schemes to reflect the ending of contracting-out requires the permission of the original contracting authority.
  • Companies need to review the pension provisions of outsourcing contracts.
  • If changes to the outsourcing contracts are required, open negotiations with the public authority.
  • Action needs to be taken before any contracting-out changes are effected by the employer.
  • Companies need to consider whether to continue with broad comparability or to approach contracting authorities to participate in the public service schemes under New Fair Deal.

The ending of contracting-out

In April 2016, the ability of defined benefit pension schemes to contract out of the state second pension will end.

The ending of contracting-out has a number of consequences for employers:

  • Employer and employee national insurance contributions will increase.
  • If employers wish to make changes to contributions to or benefits under the scheme they will have to consult with employees.
  • Trustees will need to reconcile their scheme's contracting-out data with HMRC.

Under section 24 of the Pensions Act 2014, an employer has a statutory power, subject to certain restrictions and safeguards for members, to amend an occupational pension scheme to reflect the ending of contracting-out.

Many employers are currently deliberating as to whether to bear the cost of the ending of contracting-out themselves or to amend the scheme so members also bear some of the costs either through increased contributions or reduced future benefits.

Fair deal

In October 2013, HM Treasury released their revised guidance (New Fair Deal) which replaced HM Treasury's previous guidance papers. Both the previous HM Treasury papers were implemented into government policy by the Cabinet Office Statement of Practice (Old Fair Deal). Under New Fair Deal, persons who contract with central government departments or agencies, the NHS or certain other public authorities will be entitled to be admitted to a relevant statutory pension scheme for pensioning staff going forward.

However, under Old Fair Deal, participation in the statutory pension schemes (other than the Local Government Pension Scheme) was not generally allowed. A person who contracted with a central government department or agency or the NHS was required to provide a pension scheme which was certified by the Government Actuary's Department (GAD) as being "broadly comparable" to the pension scheme employees were members of immediately prior to their transfer to the contractor.

Broad comparability

In order to be certified as broadly comparable to the relevant public service pension scheme, the contractors' schemes had to have certain key elements:

  • They had to be defined benefit pension schemes.
  • They had to be registered with HM Revenue and Customs.
  • They had to be contracted out of the state second pension regime.

The schemes were not required to mirror the public service pension scheme so there could be some differences (for example, in contribution or accrual rates) as long as, overall, GAD were satisfied that the scheme was broadly comparable to the relevant public service pension scheme.

Snapshot or not

Old Fair Deal required a broadly comparable pension scheme to be in place for transferring employees at the point they transferred their service from the public authority to the private contractor. As Old Fair Deal was a non-statutory government policy, the requirements of Old Fair Deal needed to be given contractual force by wording incorporated into the outsourcing contract in place between the public authority letting the services and the contractor contracting to provide those services.

Many contracting authorities, though, went further than the minimum Old Fair Deal requirements by requiring their contractors to establish and maintain for the duration of the contract a broadly comparable scheme through the outsourcing contract. In practice, the "onward bulk transfer" requirements contained in Old Fair Deal meant that many contractors would maintain their broadly comparable schemes to allow them to meet their onward bulk transfer obligations in any event.

Old Fair Deal contractual requirements

Many contractors who have entered into service contracts with public authorities may not simply be able to use the statutory power to amend their scheme. They may also be subject to contractual requirements to maintain schemes which are broadly comparable to the public service schemes as at the date the outsourcing contract became effective.

This may mean that, before such an employer can make any changes to its broadly comparable scheme, it may have to renegotiate the pension terms in its outsourcing contract with the relevant public authority to allow amendments to be made to the broadly comparable scheme.

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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