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Extension of Fair Deal to Local Authorities

The end for new broadly comparable pension scheme arrangements

The Government has recently published a consultation along with draft regulations (the Draft Regulations) which amend the revised Fair Deal guidance issued by HM Treasury in October 2013 (Fair Deal 2013). The proposal is for Fair Deal 2013 to be extended to cover Local Authorities, with the existing Best Value Staff Transfer (Pensions) Direction 2007 (the 2007 Direction) being revoked in due course.

In summary, the key changes proposed are that:

  • except in the case of retenders of existing contracts, private sector contractors must enter into Admission Agreements to enable transferring employees to continue to be members of the Local Government Pension Scheme (LGPS), with the option of using a broadly comparable scheme withdrawn;
  • private sector employers participating in the LGPS will be permitted to receive any surplus assets in their notional LGPS fund upon ceasing to be a scheme employer; and
  • Admission Agreements may, in principle, be backdated where it is not possible for the Admission Agreement to be signed in advance of the contract start date.

Specific details of the consultation and Draft Regulation are set out below. We also look at the impact on private sector contractors.

Scope of the Draft Regulations

The Draft Regulations will apply to employees who are active members of (or eligible to become active members of) the LGPS and who are compulsorily transferred from Local Authorities and other employers listed in Fair Deal 2013. This includes bodies that are designated as eligible and that participate through an Admission Agreement. Higher and further education institutions are specifically excluded from the Draft Regulations.

First generation and subsequent transfers: Admission Agreements

For future first generation transfers, it is proposed that contractors will be required to enter into Admission Agreements to procure the continued membership of the LGPS for transferring employees. It will not be possible for contractors to offer membership of a broadly comparable scheme as an alternative. Bonds, indemnities and guarantees may still be required to be provided in respect of contractors by the relevant Administering Authorities, protecting against the risk of employers admitted to the LGPS becoming insolvent or failing to make payments required under Admission Agreements. 

For second and subsequent generation transfers, where a new contractor accepts a transfer of employees who continue to be wholly or mainly employed on the delivery of the service or function first transferred, the new contractor will also be required to enter into an Admission Agreement in respect of those employees. This will be the case even if the incumbent contractor has provided membership of a broadly comparable scheme, or if the new contractor has its own broadly comparable scheme which could be used for this purpose.

Re-tendering and existing 'broadly comparable' arrangements

The consultation proposes that contractors who currently use a broadly comparable scheme for protected employees should not be required to transfer them to the LGPS in the event that they are successful in a retender of their contract. In this case, the incumbent contractor would have the choice of enabling the relevant employees to continue to accrue benefits in the broadly comparable scheme or entering into an Admission Agreement to enable the employees to accrue future benefits in the LGPS.  That said, the consultation specifically seeks views on whether this is the right approach, so could be subject to change.  

From a practical perspective, the contractor's decision in this regard is likely to depend on the extent to which the contracting body is prepared to share risk with the contractor (ie if any "pass through" terms can be agreed). However, second or subsequent generation contractors taking on employees from an incumbent contractor using a broadly comparable arrangement must, where possible, take steps to ensure that any shortfall in a bulk transfer paid from a broadly comparable scheme is met either by the incumbent contractor or by the contracting authority. The new contract between the contracting authority and the new contractor (and/or the Admission Agreement) should make clear that the past service liabilities relating to the transferring employees are 100% funded on entry and that there shall be no requirement on the new contractor to make good any shortfall from a bulk transfer.

Risk sharing under new arrangements

The Draft Regulations state that tender documents should clearly set out the costs of providing a local government pension to transferring employees. 

It is proposed that participating employers will be permitted to receive any surplus assets in a fund upon ceasing to be a scheme employer. On the face of it this is a positive development for private sector contractors, given that Fair Deal 2013 has been criticised for making contractors liable to pay deficits but not entitled to take the benefit of any surplus on the termination of Admission Agreements.

The reasoning behind the change is to give more flexibility to administering authorities to manage liabilities when employers leave the LGPS. It remains to be seen what effect this new provision will have on risk sharing and it is expected that risk sharing strategies may, in many cases, be revisited for future contract awards. A potential concern for private sector contractors might be the improved negotiating power of administering authorities in seeking preferred employer contribution terms or greater employer risk exposure on exit.

Other proposed administrative changes

The Draft Regulations also make the following smaller but helpful amendments:

  • clarity over the fact that Admission Agreements can be backdated to the contract start date (as it is common that pensions arrangements are not finalised until after this);
  • removal of the requirement to send details of Admission Agreements to the Secretary of State; and
  • that the obligation to publish a list of Admission Agreements entered into under Fair Deal 2013 has been delegated to the relevant administering authority.

Next steps

The consultation ends on 20 August 2016, following which the Draft Regulations should be finalised and published. We will produce a further briefing once the outcome of the consultation is known. In the meantime, any contractors currently involved in a tender process should engage with the contracting authority as soon as possible, to determine whether the proposals set out in the consultation and Draft Regulations should be incorporated into their new contract.

This publication is intended for general guidance and represents our understanding of the relevant law and practice as at June 2016. Specific advice should be sought for specific cases. For more information see our terms & conditions.

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