Despite earlier indications, the government announced in December that it intended to retain the Fair Deal policy on public sector pensions. Taken in isolation this is bad news for private and third sector providers seeking to take on NHS outsourced work, as the policy adds considerably to staff costs and puts them at a financial disadvantage on procurement when there are competing bids from the public sector. The potentially better news is that the impact of this decision might be lessened by the Government allowing transferring staff to remain within the NHS pension scheme, although it is not yet clear at what cost to the provider that would be.
Background
The Fair Deal is a non-statutory policy which provides greater protection to the pension benefits of public sector staff compulsorily transferred to a non-public sector employer, than would otherwise be the case under the TUPE Regulations. Under the provisions of the Fair Deal the new employer is required to provide a "broadly comparable" pension scheme approved by the Government Actuary's Department (GAD). (The alternative of participation in the relevant public sector scheme is mainly available only on local government transfers.)
The effect of this requirement is significant in two ways. First the cost to an employer of a scheme broadly comparable with the NHS scheme is considerably greater than the cost of a typical private sector defined contribution scheme, and certainly greater than the legal minimum for employees who transfer under TUPE, which is for the employer to match employee contributions up to a maximum of 6% of basic pay. Secondly there is a considerable difference between what NHS Trusts pay back to the Treasury to account for the cost of employees' pension entitlements, and the cost to an independent sector provider of paying into a GAD certified pension scheme - a difference which may be in the region of 20% of basic pay. Unsurprisingly, this can mean that private sector organisations are at a competitive disadvantage when bidding for contracts against NHS Trusts.
Reforms
Following a recommendation by Lord Hutton to address the Fair Deal policy in his report on the long term affordability of public-sector pension schemes, the government commenced consultation on the policy earlier last year. The consultation offered three options for comment - no change, reform or ending the Fair Deal altogether. The consultation period ended in June 2011 and it was widely expected, in the context of its wider reforms of public sector pensions, that the Government would scrap the policy.
However the issue became caught up in the wider debate about the reform of public sector pensions and the Government's attempts to come up with a package which would achieve its economic aims but be acceptable to the unions. So in his statement to parliament on 20 December last year, the Chief Secretary to the Treasury, Danny Alexander, announced that the Government had agreed to retain the Fair Deal but would:
"consider what practical options might be available to reform the terms of access to the NHS pension scheme, in particular for NHS staff who move to a non-NHS Any Qualified Provider delivering NHS services."
The Government hopes that this approach will mean that organisations will no longer be deterred from bidding for public sector contracts by the risks and costs associated with taking on defined benefit contribution schemes. Unfortunately the announcement does not contain any detail on how that will work or how the pension cost and risk will be shared between the new provider and the relevant NHS body. This may be forthcoming when the Government issues its formal response to last year's consultation, which is expected to be in the next few months.
In any event, the retention of the Fair Deal is conditional on the public sector unions accepting the Government's overall pension deal. A number of major unions, including Unite and the NUT, have rejected the government's proposed heads of agreement, with only UNISON and the GMB union agreeing to continue negotiations.
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