Extending ‘Fair Deal’ to the Local Government Pension Scheme

What is ‘Fair Deal’?

The ‘Fair Deal’ policy was introduced in 1999 to ensure a level of pension protection for employees transferring from central government to private sector contractors by requiring the new employer to provide the employers with a ‘broadly comparable’ scheme.

In 2013, it was further amended so that employees transferring from central government, the NHS or agencies would have to be provided with continued access to the public sector scheme as an alternative to the provision of a ‘broadly comparable’ scheme.

Currently, Fair Deal does not apply to local government TUPE transfers. Instead, they are governed by the Best Value Authorities Staff Transfers (Pensions) Direction 2007 which requires the new private employer to acquire pension rights for transferring staff which are the same as, better than, or broadly comparable to the pension rights they had as local authority employees

What has happened?

In May, the government published a consultation on extending Fair Deal to the Local Government Pension Scheme (‘LGPS’), together with a set of draft Regulations. The consultation proposes various other changes to the LGPS regulations, which are aimed at tidying up drafting problems. If the proposals go ahead, the ‘Best Value Direction’ will be revoked. The consultation closed on 20 August.

What are the potential changes?

Admission Agreements

Under the new proposals, transferring employees would now remain in the LGPS and any new employer will be obliged to become an admission body participating in the LGPS. The option of providing a ‘broadly comparable scheme’ would no longer be available.

The proposals also define a new category of employees, known as a ‘protected transferee’   – i.e. staff who are participating in the LGPS and who are compulsorily transferred to an employer that doesn’t offer access to the LGPS.  There will also be a new category of employer called  “protected transferee employer”. These employers will be obliged to participate in the LGPS under the 2013 Regulations in respect of the “protected transferees” that they receive.

Further, on a re-tender which involves staff who have already transferred to a broadly comparable scheme, the proposal is that neither the incumbent contractor (if they are bidding in the re-tender), nor any other bidder, should be required to obtain admission to LGPS for the purposes of the new contract, although they will be able to opt to do so.

It is also worth noting that the new draft Regulations allow for admission agreements to be backdated (at present, not all local authorities are willing to do this). This will assist in ensuring pension issues do not unduly delay contract tendering processes.

Finally, the requirement for admission agreements to be notified by the Secretary of State will be removed. Instead, administering authorities will publish a list of all admission agreements entered into. A 12 month transitional period would be granted for compiling and publishing these lists, should the proposals be implemented.

AVC’s (additional voluntary contributions)

Members will be given the choice of applying any AVC’s under the LGPS to provide a number of benefits including a pension commencement lump sum, one or more uncrystallised funds pension lump sums, or purchase of an additional pension under the LGPS.

Employer’s consent to early retirement under Regulation 30 and 30A of the Local Government Pension Scheme (Benefits, Membership and Contributions) Regulations 2007

The need for employers or former employers consent will be removed for members between the ages of 55 and 60 with deferred benefits built up under the 2008 scheme. This is because these benefits will be actuarially reduced, by default.

Exit valuation surpluses

If there is a surplus after a cessation valuation the LGPS Regulations do not permit any funds to be returned to the participating contractor.  Under the proposals where there is a surplus upon an exit valuation, the local authority will have now have to pay this to the exiting employer. This is intended to ensure that employers can be required to fund their liabilities generously, since the new provisions will remove the risk that a “trapped surplus” will arise which would be lost to the employer on leaving the scheme.

Deferred members rejoining

Where an employee leaves the scheme and re-joins at a later date, they will have 12 months in which to opt to aggregate his/her deferred benefits within the new account.

Comment

The proposals seek to give further certainty and protection for local authority employees. However, many contractors may be reluctant to bid for local authority contracts if they no longer have the choice of providing a broadly comparable pension.

The ability to repay a surplus on an employer ceasing to be an admitted body will most likely be welcomed by contractors in the LGPS. However, we suspect that this could lead to local authorities no longer agreeing to caps on contractor contributions to the LGPS or refusing to provide indemnities for exit debts.

Those involved in public sector outsourcing would do well to carefully review the details of these proposals.  For further details of the consultation itself, please see here. For any other questions, please contact a member of the Devonshires Employment and Pensions Team.

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