New Fair Deal guidance: A fairer deal?

Posted: 29/11/2013


Introduction

HM Treasury has published “Fair Deal for staff transfers: staff transfers from central government” (October 2013) (Fair Deal 2013). This follows on from indicative changes set out in the ministerial statement published on 4 July 2012.

The changes set out in Fair Deal 2013 relate to the manner of how the Fair Deal protection is to be applied in the future - the current requirements to provide "broadly comparable" benefits to those set out under the relevant public sector scheme post transfer, will be replaced by a requirement for the contractor to participate directly in the public sector scheme on behalf of the transferring staff. This is much like the current approach for outsourcing from local authorities, where contractors have the option to participate in the Local Government Pension Scheme (LGPS) by way of an admission agreement.

The revised guidance confirms that the current “broadly comparable” requirements will continue to be an option for contractors in limited circumstances, including on a re-tender of services in some cases.

Broadly Comparable Benefits: the origins of the Fair Deal requirements

Prior to the Fair Deal 2013, the current Fair Deal guidance for staff transferring from the public sector to the private sector is based on government guidance published in 1999 (HM Treasury Guidance: "A Fair Deal for Staff Pensions") and 2000 (Cabinet Office Statement of Practice – Staff Transfers to the Public Sector) (the Old Fair Deal Requirements). Since 2007 there has been statutory protection for staff transferring from the LGPS from local government (and other "best value authorities").

The old Fair Deal requirements required contractors bidding for Government contracts to put in place protections in relation to the provision of pension benefits for transferring staff. These protections applied also to re-tendering of Government contracts at the end of the contractual term. The protections required the contractor to provide pension benefits for transferring staff post transfer that were "broadly comparable" to the pension benefits provided before the transfer in the relevant public sector scheme. This approach involved considerable expense and complexity for contractors bidding for government contracts.

In most cases the provision of "broadly comparable" pension benefits involved the contractor setting up or participating in a private defined benefit pension arrangement, which was approved by the Government Actuary's Department.

The old Fair Deal requirements also required accrued pension benefits to be protected, which involved a complex process whereby transferring staff were offered the chance to transfer their accrued pension benefits (in the relevant public sector scheme) to the contractor's scheme calculated on a "like for like" service basis (in order for their past benefits to retain the link to present salaries).

Bulk transfer terms involving large numbers of transferring staff can be very expensive and impact on the commercial terms of any outsourcing bid. Actuarial assistance is required to agree the terms, which relate to what value the public scheme will put on the transferring liabilities (and the value of service credits to be provided in the contactor’s scheme to reflect these liabilities).

Additionally where there is a shortfall in the value of the accrued pension benefits for the transferred staff at the end of the contractual term, this can lead to additional costs for the contractor where there is an onward bulk transfer, either back to the public sector or to another contractor's scheme.

Changes to the Fair Deal – A Fairer Deal?

Fair Deal 2013 follows on from the ministerial statement published on 4 July 2012, which announced that Fair Deal was to be reformed. The main theme is that Fair Deal protection is set to stay, it is just the manner of how the protection will apply that is to change.

Following the revised guidance, the new Fair Deal policy will apply to:

  • New tenders – where staff are transferred from the public sector to the contractor for the first time;
  • Re-tenders – where staff return to the public sector after the end of the contractual term, where staff remain with the contractor after it wins the re-tender, or where staff transfer to a new contractor which wins the bid for the services on the re-tender.

New Tenders

Under Fair Deal 2013 all staff will have the option of remaining in their public sector scheme after the tender, and continuing to accrue pension benefits for periods of service with the contractor. The "broadly comparable" requirements set out under the old Fair Deal requirements will cease to apply in most cases. Leading from this, there will be no requirement for the agreement of bulk transfer terms, as member's accrued benefits will remain in the public sector schemes and linked to future salary levels.

Contractors will be required to enter into “participation agreements” with the relevant public sector pension scheme (much like the current option for employers under the LGPS where there is an outsourcing of a service provision from a local authority to a private contractor).

A “participation agreement” will provide for the payment of contributions (member and employer contributions) as well as “exit” debts at the end of the contractual period where additional employer liabilities may be identified. Contractors may be required to give indemnities and/or bonds as security in connection with the terms of the participation agreements (much like the process with employers participating in LGPS under admission agreements).

Re-Tenders

This is the situation where there has been an outsourcing exercise, and staff have transferred to a contractor in accordance with the old Fair Deal requirements. When this contract comes to an end, the service function may return to the public sector, the incumbent contractor may win another contractual term or a new contractor may win the work.

Where the service provision stays in the private sector, under Fair Deal 2013 the starting position is that contractor will provide access to the public sector pension scheme relevant to the public sector workers who were originally outsourced from the public sector. This would involve the agreement of a “participation agreement” in the relevant public sector scheme together with appropriate bulk transfer terms (to reflect the value of accrued pension benefits built up in the contractor’s scheme after the original outsourcing).

Fair Deal 2013 preserves the continued application of the old Fair Deal requirements (based on “broad comparability”) in limited situations. These include on a re-tender, where the contracting authority is unable comply with its obligations under procurement law to treaty economic operators equally if it was to require the incumbent contractor to provide access to a public sector pension scheme. In that case, the authority would allow the incumbent contractor a choice to offer “broadly comparable” benefits instead.

Summary

The changes to the Fair Deal confirm the Government’s commitment to Fair Deal protection for public sector employees following outsourcing exercises from central government. Many commentators had argued for the Fair Deal requirements to be scrapped, making way for a more commercial approach to outsourcing exercises.

The revised Fair Deal looks to be a similar process to that following outsourcing from local authorities, whereby contractors have the option to participate in the LGPS by way of an admission agreement. This dispenses with the complicated approach of agreeing bulk transfer terms, to agree the value of service credits to be provided in the contractor’s scheme to reflect the value of the accrued benefits the employee has built up in the public sector scheme.

What is clear is that contractors will need to carefully consider the terms of their “participation agreement” in the public sector scheme. They will have no control over the public sector scheme, but may have open ended liabilities to pay contributions and other associated costs (including additional costs associated with early retirement and exit penalties).

There may still be room for contractors to argue the old Fair Deal Requirements still apply (based on “broad comparability”), giving greater flexibility in some circumstances.


Return to news headlines

Penningtons Manches Cooper LLP

Penningtons Manches Cooper LLP is a limited liability partnership registered in England and Wales with registered number OC311575 and is authorised and regulated by the Solicitors Regulation Authority.

Penningtons Manches Cooper LLP