23 Jan 2019

When New Fair Deal was published in October 2013, it did not apply to local authorities. The Government launched a consultation in May 2016 (2016 Consultation) outlining its proposals to bring local authorities within the scope of New Fair Deal. As we explained, a number of flaws in the Government's proposals were highlighted in the consultation responses and, as a result, the Government decided to reconsider its proposals and issue another consultation at a later date. That consultation was published this month (2019 Consultation).

New Fair Deal

At present, the pension benefits of current and former local authority staff who are, or have been, compulsorily transferred to a service provider are not protected by New Fair Deal, they are instead protected by the Best Value Staff (Pensions) Direction 2007 (2012 for Wales). The 2016 Consultation had proposed revoking the Best Value Direction and implementing New Fair Deal in the Local Government Pension Scheme (LGPS) legislation instead. Under the proposals, protected staff would be given access to the LGPS on any first or later generation outsourcing (except in exceptional circumstances); the option to provide a broadly comparable pension plan would disappear.

The 2019 Consultation addresses a number of concerns that were highlighted in the 2016 Consultation, including the fact that the Government's proposals did not properly consider the wide variety of employers in the LGPS and the historical context behind their participation in the Scheme. As a result, the proposals would have been further-reaching than New Fair Deal.

The main proposals in the 2019 Consultation (which closes on 4 April 2019) include the following.

Limiting obligations to 'Fair Deal' employers

The proposed regulations introduce the definition of a 'Fair Deal employer' to differentiate between the different types of employer in the LGPS. It is intended that all LGPS employers will be Fair Deal employers with the exception of:

  • further education (FE) corporations, sixth form college corporations and higher education (HE) corporations (that is, post-1992 universities)
  • admission bodies, including 'community' admission bodies (such as charities and voluntary organisations) and 'transferee' admission bodies (such as providers of a transferred function or service). Admission bodies undertaking an outsourcing will have the option of requiring their service providers to offer continued access to the LGPS.

Academies would be Fair Deal employers, as would police and crime commissioners, chief constables and probation trusts.

It is proposed that the right to rejoin the LGPS would also apply to employees who are currently enrolled into a broadly comparable pension plan in compliance with the Best Value Direction, if the contract they work on is retendered.

Bulk transfers

New Fair Deal requires that protected employees are proactively contacted and offered the chance to transfer their rights accrued in a broadly comparable pension plan to the public service pension scheme, on favourable terms. A similar process set out in the 2016 Consultation was not well-received. The 2019 Consultation proposes instead that employees who are currently enrolled into a broadly comparable pension plan in compliance with the Best Value Direction will have a right to transfer their benefits from that pension plan into the LGPS if they make a request.

Any such transfer will be on an individual basis, not a bulk transfer basis (which is likely to be less generous, on the whole). This is intended to protect taxpayers and to deliver consistency of treatment across the LGPS membership.

'Deemed employer' status

Under the 2019 Consultation, contractors will not necessarily need to become admission bodies in the LGPS to be able to participate in the Scheme. Instead, they could use ‘deemed employer’ status, a mechanism to promote risk sharing between Fair Deal employers and contractors.

Using this approach, the contractor would not have direct responsibility for payments to the LGPS. The default position would be that the Fair Deal employer would retain the majority of scheme employer responsibilities (including, crucially, the obligation to pay contributions and to deal with funding risk), with the contractor being responsible for certain 'employer' decisions that give rise to costs, such as ill-health, redundancy and early retirement. However, the service agreement with the contractor would stipulate the reimbursement of costs from the contractor to the Fair Deal employer, for example by means of a fixed contribution, as well as any other exceptions requiring additional reimbursement from the contractor such as costs arising from excessive salary increases or redundancy decisions.

The regulations are likely to make clear that the contractor is still responsible for the deduction of employee contributions and for paying them over to the LGPS Fund, and for the provision of information to assist with the administration of the LGPS Fund.

The consultation states that academies looking to use the deemed employer approach will only be able to do so where they have followed the guidance (yet to be published) from the Department of Education (DfE). This guidance will set out the provisions that must be included in the service contract to protect the academy and ultimately the DfE.

Triggering debts on reorganisation and merger

When a scheme employer undertakes a reorganisation or merger with another organisation, even where that other organisation already participates (or intends to participate) in the LGPS, an exit payment can be triggered. If it is paid it reduces the assets of the scheme employer; to avoid payment, the LGPS Fund must agree to allocate the liabilities to the other organisation. The Government has accepted that the lack of certainty over whether the LGPS Fund will agree, and also the lengthy process sometimes involved in obtaining that agreement, have the potential to hinder these transactions. Therefore it has proposed an automatic mechanism to transfer the underlying liabilities from the scheme employer to the successor.

Where the successor already participates in another LGPS Fund, there will be an automatic mechanism for moving all of the assets and liabilities to the successor's LGPS Fund, so that they are contained in one place. This means that an application will no longer have to be made to the Secretary of State for this to happen.

Our comment

It's no surprise that academies would be caught by the new requirements. At present, academies are covered by New Fair Deal but local authorities are caught by the Best Value Direction, so the change would impose consistency. However, academies will be very interested to see what the DfE's guidance on the deemed employer model looks like, and whether using that model in practice is going to make any difference to negotiations with service providers about pension risk and cost.

Admission bodies and HE/FE institutions will be delighted to learn that they will not have to require their service providers to offer staff membership of the LGPS or a broadly comparable pension plan. Whether trade unions will push for these organisations to do so, is a different matter.

It is odd though that all admission bodies are excluded from the requirement to oblige a service provider to secure access to the LGPS. The obvious sequence of events for anyone looking to save costs would be for the local authority to outsource the service to an admission body (at which point the transferring staff are required to be protected by the admission body), and for the admission body to immediately sub-contract the services (at which point the transferring staff are not required to be protected). If local authorities wish to ensure that the chain of protection is unbroken in such a scenario, they will need specific wording in their service agreements to deliver that.

The 'deemed employer' concept is an interesting new solution to an old problem. It is unlikely to reduce the legal workload, in terms of documenting the commercial arrangements between the Fair Deal employer and the contractor, and it may not remove the administrative headache caused by reimbursement mechanisms and the awkward process of identifying the cost impact of excessive salary increases and other employer decisions. However, it is possible that the deemed employer approach will create some flexibility for contractors in how they account for their pension liabilities, because the legal responsibility for all contributions to the LGPS will technically remain with the Fair Deal employer.

Speaking of agreements, we suspect that LGPS Funds will not warm to the idea that risk-sharing wording is included in their admission agreements, where service providers become admission bodies. For a long time now, LGPS Funds have moved towards making their admission agreements as "non-negotiable" as possible and have resisted the inclusion of risk-sharing wording, in order to reduce their costs and also to avoid having to become involved in a tripartite discussion about what is essentially a bipartite issue - to what extent the contracting body is going to assist the contractor with pension costs-whose proper place is in the service agreement, not the admission agreement.