Earlier this month the government published its new Fair Deal guidance (see Legal update, Public-sector pensions: Fair Deal 2013 published).
This post looks at the reasons the government considered that Fair Deal needed to be reformed, the options that were available and the conclusions that the government has come to.
The new guidance follows a consultation, launched in 2011, in which the government made its antipathy to Fair Deal clear, specifically the risks and costs associated with requiring contractors to offer former public sector employees membership of a broadly comparable pension scheme after transfer.
In some cases, employer contributions to these broadly comparable pensions could be as high as 45% of pensionable pay (see Legal update, Consultation launched on the future of Fair Deal and Opinion, Farewell to fairness? The future of the Fair Deal on public sector pensions).
In addition, the risk of employers having to make good a crystallised deficit if those employees left that scheme following a subsequent transfer to a replacement service provider was real, unquantifiable and could put the very survival of the contractor at risk. In the government’s view, these risks added to the list of reasons why smaller companies may be dissuaded from bidding for public contracts.
Opening up the public sector schemes to private employers
The case for reform was therefore strong. But what to do? One solution may have been to open up the public sector schemes to new employers as is possible with the Local Government Pension Scheme (LGPS), through the admission body route, and, to a limited extent to the NHS and Teacher’s Pension Schemes.
However, in its consultation, the government shared advice it had received from the Independent Public Service Pensions Commission stating that access to public sector schemes should not be widened to admit private employers:
“There are important arguments against widening the current provisions. Doing so would involve the government bearing additional risks arising from pension liabilities accrued in the private sector. But the government would have little control over the liabilities being accrued, since it would not set the wages of these employees.”
These risks are significant. However, they have to seen against a background in which the public sector purchaser currently bears the costs of the contractor’s provision of a broadly comparable scheme through the contract price. Assessment of these costs is not an exact science and different pricing models are used in an attempt to create clarity. In some cases, the issue is barely addressed in the procurement phase, leading to a scramble to resolve pension risk prior to contract signature, or even after the transfer has occurred, leading to further commercial and procurement risk for the contracting authority.
Why keep the policy at all?
So why not scrap the policy completely? There are two reasons why not. Firstly, it could have led to increased outsourcing from the public sector expressly to reduce costs by removing individuals’ contractual rights to access the relevant public sector pension scheme (pension rights are broadly excluded from TUPE so do not transfer). Such a draconian measure would undoubtedly have a serious impact on the individuals concerned, their trust and confidence in their public sector employers and therefore on the public services they provide.
Secondly, with the reforms to the public sector pensions, the government is reducing the costs of providing public sector schemes by moving from final salary to career average benefit structures. In other words, costs can be reduced from both sides of the transfer, rather than maintaining a final salary scheme one side and a poor alternative on the other (see Legal update, Public Service Pensions Act 2013 published).
What was the final outcome?
In the light of these facts, it is perhaps not surprising that the government has elected to retain the principles of Fair Deal, while (mostly) eliminating the less easily quantifiable costs of the broadly comparable schemes. The outcome: the government has not followed the advice of Independent Public Service Pensions Commission and Fair Deal will now allow employees to remain in their public sector schemes rather than requiring them to transfer to a broadly comparable alternative. This is actually more favourable to employees as however “broadly comparable” the alternative would be, such schemes were always riskier than the public sector scheme as they lacked the protection of government backing.
While the mechanics of participation are yet to be disclosed, it is likely that they will be similar to those applicable to admitted bodies in the LGPS. Indeed, given that the LGPS is a funded scheme, the risks around private sector employer participation in the other public sector schemes, which do not fluctuate in value in the same way, are likely to be relatively easily addressed.