Following a consultation process which began in early 2011, the Treasury has finally published its revised Fair Deal for staff pensions’ guidance. The new policy comes into effect immediately and will allow private contractors to participate in public sector pension schemes so that transferring staff can remain members of their existing public sector scheme.
“Old” Fair Deal
Fair Deal sets out how pensions should be dealt with when staff are compulsorily transferred from the public sector to independent providers delivering public sector services. Under the old regime, transferring public sector staff generally had to be offered membership of a “broadly comparable” private pension scheme. In addition, employees had to be given the option to transfer (on a generous basis) their accrued public sector pension scheme rights to their new employer’s scheme. The costs and risks associated with complying with Fair Deal deterred many independent providers from bidding for contracts and were widely acknowledged to be a clear barrier to the plurality of public service provision.
The Fair Deal guidance has been revised with the goal of ensuring that transferring public sector staff continue to have access to good quality pensions while at the same time achieving “better value for money for the taxpayer by reducing the costs and risks to employers associated with the provision of broadly comparable pension schemes, thereby opening public services to greater competition”.
Going forward, staff who are compulsorily transferred from the public sector to a private contractor will be entitled to continue to be members of the public sector scheme they were in immediately prior to the transfer. Staff will remain eligible to continue their membership of the public sector scheme on a subsequent compulsory transfer. In addition, staff previously transferred out of the public sector under old Fair Deal will generally be given the opportunity to rejoin their original public sector pension scheme on a re-tendering process.
In order to facilitate the new provisions, private contractors will need to participate in the public sector pension scheme and a participation agreement setting out the terms of its participation will usually have to be agreed. Fair Deal acknowledges that “Scheme regulations and internal controls must include provisions to manage the risk associated with allowing a wider range of employers and employees to participate in the public service pension schemes”. It remains to be seen how the terms of participation agreements will develop to reflect this. For example, will public sector schemes take advantage of the suggestion in the guidance that different rates of contributions may be charged to participating employers considered to be at a higher risk of default? Scheme rules may also include provision for exit payments where an employer leaves without having fully satisfied its liabilities to the scheme and for the provision of indemnities, guarantees or bonds by participating contractors to protect the scheme from potential costs arising from their participation in the scheme.
When does it apply?
New Fair deal is in force now and should be followed where possible. However, for procurements which are already at an advanced stage, old Fair Deal can continue to apply. In addition, it will take time for public sector schemes to make the necessary changes to their rules and practices to allow for the continued participation of transferred staff and, until these changes are made, the old guidance will apply. The new Fair Deal policy should, however, be followed in all cases from April 2015.
Fair Deal in Scotland
Fair Deal does not directly apply to matters devolved to the Scottish government. However, in the past, the Scottish government has upheld the principles set out in Fair Deal and is likely to do the same with the revised version but we will update you on developments.
Hopefully, the revised Fair Deal will lead to the desired increase in competition on outsourcing which should in turn lead to cost savings for the Government. On the other hand, new Fair Deal means that former public sector employees will now remain in public sector schemes, and therefore remain the ultimate responsibility of the Government, long after their transfer to private sector employers.