Originally published in Insight - Human Capital (Pensions), Spring 2008
2007 was a turbulent year for employers holding passports issued by the Government Actuary's Department (GAD), with unilateral withdrawals of Local Government Pension Scheme (LGPS) and Principal Civil Service Pension Scheme (PCSPS) passports followed by lengthy delays in the renewal process. Whilst GAD has responded pragmatically to the commercial issues faced by employers without valid passports, the current refusal by GAD to issue National Health Service Pension Scheme (NHSPS) passports with an expiry beyond 31 March 2008 does not auger well for a long-term solution.
Fair Deal Policy
Passports come into play when employees are transferred from the public to the private sector. Since 1999, the Government's "Fair Deal on Pensions" policy (Fair Deal) has stipulated that the new employer should be required to provide pension benefits for future service that are "broadly comparable" to those offered in the public sector. In 2004 the Government clarified how Fair Deal applies to second and subsequent generation transfers. GAD is responsible for certifying that the benefits provided in the new scheme meet the requirement for broad comparability. This certification can be provided for a specific transaction or on a rolling 12-month basis, in which case the certificate of broad comparability from GAD is known as a "passport".
Changes To Public Sector Schemes
The recent issues with passports stem from the changes that are being made to various public sector schemes. For example, a new benefit structure is being introduced in the LGPS from 1 April 2008. GAD is of the view that employers must take these future changes into account as soon as they are sufficiently "known", notwithstanding that they have not yet been implemented.
This is in spite of the fact that both GAD and the Government have repeatedly confirmed that the broad comparability test under Fair Deal is intended to operate at the point of transfer from the public sector. Indeed, employers who amend their schemes following the transfer to match changes made to the applicable public sector arrangement can run into difficulties on a second or subsequent generation transfer. As it currently operates, on each such transfer Fair Deal requires benefits to be re-set to those enjoyed by employees when they first transferred into the private sector. (Note, however, that a recent statutory direction extending Fair Deal-type protection to employees transferred from "best value authorities" – the subject of a separate article in this edition of Insight – requires a subsequent contractor to provide broadly comparable benefits to those enjoyed by employees immediately prior to the second or subsequent transfer.)
GAD's rationale for its approach is that, for example, employees who transfer out of the LGPS before 1 April 2008 already have an expectation that, had they remained in the public sector, they would have moved onto the new LGPS benefit structure from that date. This expectation should, GAD feels, be taken into account when assessing whether the private sector scheme is broadly comparable to the LGPS in its current form.
Many commentators view the actions of GAD as unreasonable in the circumstances, arguing it is going beyond its powers and duties. GAD is a public body and, the argument goes, as such, is subject to an obligation to act fairly and within the limits of the powers given to it by parliament. Those powers do not extend to policy-making: GAD is simply an advisory body. Moreover, Fair Deal itself tasks GAD with ensuring that the arrangements for certifying broad comparability are not "so cumbersome or expensive to administer as to militate against finding a justifiable business solution".
GAD's current refusal to issue NHSPS passports that last beyond 31 March 2008 is a result, GAD says, of employers with LGPS and PCSPS passports continuing to present them when tendering for contracts after GAD has announced their withdrawal. Whilst a review of the NHSPS benefits is underway, we do not yet know what, if any, changes will be made. There is no guarantee that this information will become available before 1 April 2008. Presumably if there are delays then GAD will only be prepared to renew NHSPS passports for a further limited period, increasing employers' costs still further.
The Position Of Contractors
Unilaterally (and, in the case of LGPS passports, retrospectively) withdrawing existing passports and issuing passports with a duration of less than 12 months has put some employers to significant additional costs in terms of both time and money. Requiring employers to take account of future benefit changes that may still be subject to amendment is going to be potentially difficult and costly for employers to implement. Is this not too cumbersome and expensive to administer as to militate against finding a justifiable business solution and so contrary to Government policy?
In addition to raising these issues with our contacts at GAD on behalf of specific clients, Hammonds has been instrumental in getting the Association of Pension Lawyers to contact GAD on an industry-wide basis. We look forward to participating in a meeting with the new Government Actuary to discuss the appropriateness and validity of GAD's actions more fully.
In the meantime, there are practical steps that employers can take. When the retrospective withdrawal of LGPS passports was first announced in May 2007, Hammonds obtained from GAD for a number of clients a "comfort letter" that could be produced when tendering for contracts. Broadly, these letters explain that the lack of a passport is due to action by GAD and reassure contracting public sector bodies that the employer is working with GAD to obtain a replacement passport. In our experience, GAD has been pragmatic and responsive when asked for such letters. This has been helpful, particularly given the lengthy delays employers have faced in obtaining new passports due to workload pressures at GAD caused by the flood of renewal requests.
Whilst most companies with LGPS and PCSPS passports should now have agreed new terms with GAD (even if they are still waiting for the actual passport to be issued), GAD's approach to NHSPS passports is continuing to cause employers real difficulties in pricing and tendering for contracts. There are concerns as to whether GAD is acting within its powers. Hammonds is continuing to raise this issue with GAD in an attempt to find a workable and practical solution for our clients.
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