Fair deal or no fair deal?

Cutbacks iStock 000013353612XSmall 146x219The Fair Deal is one element of public service pension provision under review by the Government following the Hutton Report's recommendations in March 2011. Zoe Lynch reviews the latest developments.

The Public Service Pensions Bill is currently in committee stage in the House of Lords, and we anticipate it will receive Royal Assent later in the year.

Once in force the Bill will create the unified legal framework underpinning the changes to the public sector schemes which have now been agreed in principle between the Government and unions. The key changes are the switch in benefit design from final salary to career average revalued earnings (CARE), the increase in normal retirement date from 60 to state pension age for most and the increase in member contributions.

The Bill also picks up many of the Hutton Report's other recommendations, for example, strengthening scheme governance and hands oversight of the public sector pension schemes to the Pensions Regulator.

We understand the Fair Deal was also the subject of negotiation between the Government and unions.

What is the Fair Deal?

Since 1999, the Fair Deal guidance has set out standards for protecting the occupational pensions of staff who are compulsorily transferred to private sector employers (for example, on a public sector outsourcing). If transferring staff cease active membership of their public sector pension scheme, the private contractor must provide pension arrangements which are at least "broadly comparable" to the public sector pension scheme the staff are leaving.

Transferring staff must be given the option of transferring their accrued rights in the public sector pension scheme to their new employer's pension scheme on a day-for-day service credit basis (or the actuarial equivalent if the differences between the schemes are significant).

Alternatively, if transferring staff are members of the Local Government Pension Scheme (LGPS) the private contractor can participate in the LGPS and allow transferring staff to continue as active members of the LGPS. This is known as ‘Admitted Body Status’.

The Fair Deal guidance is not legally binding on most public bodies but they are expected to follow the principles. The exception is local authorities who contract for the provision of services. They are required, by virtue of a direction issued in 2007 under the Local Government Act 2003, to deal with pension arrangements in accordance with some of the Fair Deal principles. The 2007 direction does not deal with bulk transfers from the LGPS to the new pension scheme and any onward transfers so the Fair Deal guidance still applies to this past service protection.

What's the latest ?

The Government confirmed that the Fair Deal will be retained, in its recently published response to the March 2011 consultation on this issue.

The Government's draft guidance proposes that the requirement to offer transferring public sector employees “broadly comparable” DB arrangements will be replaced by a policy of allowing companies admission to the relevant public sector scheme, so that employees can continue membership of that scheme.

Existing contracts

On the retendering of existing outsourcing contracts, the draft Fair Deal Guidance provides that contractors will have the option of offering a broadly comparable CARE scheme (for successful incumbents this will mean retaining their existing arrangements) or moving to the new access arrangements.

There will also be a relaxation of the current rules. "Broad comparability" will, in future, be tested against the benefit structure of the public sector scheme available to comparable employees in the public sector at the time of the re-tender and not (as currently) against public sector scheme’s benefits structure at the time of the original outsourcing. As the public sector schemes will be moving from a final salary benefit structure to CARE over the next few years, this will be welcomed by employers operating ‘broadly comparable’ schemes.

Companies with existing, Government Actuary's Department -certified, broadly comparable schemes, however, will need to check their contractual arrangements and their pension schemes' governing documentation to ensure they permit changes.

It is important to note that the draft Guidance does not apply to ‘Best Value’ authorities (such as local authorities participating in the LGPS). We expect the Department for Communities and Local Government to issue guidance to local authorities in light of the proposed new Fair Deal.

New contracts

The draft Fair Deal Guidance suggests the following approach for new outsourced contracts:

  • transferring employees will be offered access to the public sector scheme relating to their former employer (the provider will effectively participate in the public sector scheme);
  • it will no longer be possible for contractors to offer their own “broadly comparable” private pension scheme certified by GAD (unless retendering an existing contract);
  • scheme specific mechanisms are to be adopted, for example, contribution rates will be decided by schemes (subject to Treasury consent); and
  • it will not be necessary to accept a transfer relating to the member’s past service into the broadly comparable scheme.

Hutton's views

The conclusions of the Fair Deal consultation seem to run counter to the Hutton Report's recommendations. The final report, published in March 2011, recognised that providing access to public service pension schemes “helps to remove the pensions barrier for external contractors”, but nevertheless stated that there are “good reasons” for the Government to limit access. Indeed, the Report went as far as saying that it is “in principle undesirable for future non-public service workers” to have access to public service pension schemes.

It appears that the unions have won this particular battle with the Government, ensuring that the Fair Deal continues to provide protection to public sector workers who are transferred to the private sector on an outsourcing contract.

Zoe Lynch is a partner at Sacker & Partners LLP. She can be contacte on 020 7329 6699 or by This email address is being protected from spambots. You need JavaScript enabled to view it.