The outsourcing of government employees to private sector firms has never been about the government trying to offload pensions risk. The updated Fair Deal guidance allows the pensions risk to remain with the public service scheme, which in turn allows outsourcers to make more competitive bids without large risk margins. The updated guidance should be welcome news for everyone, although there will of course be transitional issues to work though, as with any change.
Whether or not the guidance applies to a particular contract depends upon who employs the transferring staff. It applies directly to central government departments, agencies, the NHS, maintained schools (including academies) and any other parts of the public sector under the control of Government ministers where staff are eligible to be members of a public service pension scheme. The guidance does not generally apply to local authorities, where an “Admitted Body” framework is already in place to allow direct participation in the scheme. The DCLG (Department for Communities and Local Government) will review whether to bring this framework into line with the guidance under Fair Deal.
Background
The Transfer of Undertakings (Protection of Employment) Regulations (“TUPE”), which were first introduced in 1981, provide relatively little provision for the protection of pensions. The Government introduced a separate non-statutory policy, known as “Fair Deal”, in 1999 for the protection of public sector pensions that applies whenever public sector employees are transferred under TUPE. This required contractors to set up a scheme that was “broadly comparable” to the one employees were transferred from, with the associated costs and statutory requirements.
Revised guidance under the Fair Deal policy was published on 4 October 2013 following a number of consultations since the first announcement of the intended changes in July 2012. The new guidance came into immediate effect, but suggests that contracts at an advanced stage should not be held up due to the change of policy. It is likely to be in contractors’ best interests, though, to push for the new Guidance to be applied whenever possible. All contracts tendered or renewed from April 2015 should comply with the new policy.
What has changed?
Under the previous guidance, the new employer had to give protected employees access to an occupational pension scheme which was “broadly comparable” to the public service scheme they were leaving. Staff could choose whether to leave their past service entitlement in the public service scheme (as a deferred pension) or transfer it to the new employer’s broadly comparable scheme under a day-for-day (or equivalent) bulk transfer arrangement.
Under the new guidance, the new employer will instead participate directly in the public service scheme. This is expected to be a simpler and less costly approach for new contracts, giving benefits to all parties:
• No need for the contractor to establish a separate scheme
• The contractor is not left with deferred and pensioner members at the end of the contract
• The pension contributions are likely to be significantly lower, resulting in a better value contract
• Members generally prefer to stay in the public service scheme
There will be cross-subsidies between employers in the public service scheme which may or may not work in the contractor’s favour. Even for a contract where this has a negative impact, though, the cost is likely to be much lower than through a broadly comparable scheme.
The new guidance should help to open up the outsourcing market to new players who either lacked the resources to establish broadly comparable schemes, or found the costs and risks previously associated with these to be untenable. It should also make it easier to understand the total costs of a contract, without the waters being muddied by ongoing pension deficits.
Ongoing contracts
If you already operate a broadly comparable scheme in relation to a contract with some time left to run, you should look now at what you might be liable for at the end of the contract, and consider your options. It may be advantageous to transfer back into the public service scheme now rather than at the end of the contract.
This will reduce the number of deferred and pensioner members to be left in your scheme at the end of the contract and will also reduce the funding risks over the rest of the contract term. The potential downside is that any current deficit would be crystallised, rather than facing an uncertain future (which could be either a surplus or deficit). The preferred option will depend on your attitude to risk and the size of the contract relative to the organisation as a whole.
Contracts up for re-tender
The incumbent contractor needs to understand the obligations it faces under the terms of the existing contract to pay a particular level of transfer value at the end of the contract. Even if they win the contract again, it is likely they will have to transfer staff (and their past benefits) back to the public service scheme.
The transfer terms out of an existing broadly comparable scheme will be set by the incumbent contractor in line with the provisions of the existing contract, if applicable. The terms for securing the necessary service credits within the public service scheme will be set by the actuary to that scheme. If bidders (including the incumbent contractor) feel that there is likely to be a shortfall between the two transfer amounts, they must request a pricing adjustment within their contact bid supported by a “Reasoned Statement of Need”. In the event that a shortfall does arise in respect of members choosing to transfer their past service, the contracting authority will be required to meet the shortfall. The important point for new bidders is not to inadvertently agree to meet the costs of any shortfall in the previous contractor’s scheme.
The new guidance does allow for broadly comparable schemes to continue to be used for re-tendered contracts, where this is deemed to be the only viable course of action by the contracting authority. The guidance also allows employees to be offered compensation in lieu of continued membership of their public service scheme or membership of a broadly comparable scheme if neither option is deemed appropriate. In practice, we would expect these exceptions to be invoked in a very small proportion of cases. Where the specific details of staff contracts of employment are problematic (for example requiring benefits broadly comparable to those at the time they left the public service scheme, whereas these schemes will shortly be converting to a Career Average Revalued Earnings basis) then the awarding authority is required to ensure that reasonable steps are taken to amend contracts, or other action taken, to enable the new guidance to be followed.
Closing down schemes
Existing broadly comparable schemes will see members transferring out at the end of each contract and no new members coming in, so their employers will eventually need to think about whether (and how) to start decommissioning these schemes. For example, whether there are enough members remaining in the scheme for it to be viable, or whether it is time to consider buying out the remaining benefits with an insurance company. Understandably, there is no suggestion of being able to transfer deferred and pensioner members back into their public service scheme.