- New Fair Deal - What Does it Mean For You?
- October 17, 2013
- Law Firm: Dentons Canada LLP - Toronto Office
Fair Deal was originally introduced in 1999 to provide pension protection for public sector staff who were compulsorily transferred to a private sector provider (Provider) as part of an outsourcing agreement
As private sector employers could not join the central government pension schemes, the policy provided that, where TUPE applied to the transfer, the Provider would need to provide the transferring staff with access to:
- an occupational pension scheme providing GAD certified benefits mirroring those of the public sector scheme that the staff were leaving;
- the opportunity to transfer their existing service from the relevant public sector scheme into the GAD certified scheme;
- the opportunity to switch between defined benefit and defined contribution benefits a certain number of times; and
- protected transfer values on onward transfer
For local government outsourcings the Provider could become an admitted body in the relevant section of the Local Government Pension Scheme (LGPS). The equivalent of Fair Deal for these outsourcings was set out in the Best Value Authority Direction 2007 (Direction), which provided for admission to the LGPS as an alternative to the options set out for central government outsourcings.
Issues for Providers
The main problem with Fair Deal was that providing access to a broadly equivalent scheme was expensive for Providers. This meant that outsourcing contracts could only realistically be bid on by the largest outsourcing firms that had the expertise to meet the requirements of Fair Deal without additional scheme set-up costs in order to meet Fair Deal.
Even then, privatised employer contribution rates for broadly comparable schemes were generally a lot higher for a funded private sector scheme than they would have been in an unfunded public sector scheme. There are also the additional burdens regarding funding, governance, and the Pension Protection Fund (PPF) levies which apply to private schemes. There also the additional costs, time and effort involved in keeping the scheme up to date to maintain GAD certification for broad comparability.
To make matters worse, the benefits required under Fair Deal were those provided by the relevant scheme as at the date of leaving the Public Sector. This meant that, as the public sector schemes reformed into less expensive schemes with higher member contributions, many longer-term contracts continued to be locked into benefits based on older scheme structures.
Issues for staff
It was not ideal for staff either. They were moving from a scheme with an implicit government guarantee to a private sector scheme with an employer only as strong as the business supporting it.
Where the company went into insolvency the staff could find themselves in the PPF with the reduction to benefits under the PPF rules applying.
Accordingly staff had to decide whether to lose their final salary link by keeping their benefits in the public sector scheme or to keep it but face the risks above.
Government consultations on changing Fair Deal
In 2011 the Government consulted on whether there was any reason to keep Fair Deal. Following consideration of the responses to this consultation, it decided that Fair Deal should be kept in some form, but that for future contracts the Government's preferred approach would be to require Providers to keep staff in the relevant public sector schemes.
In late 2012 the Government held a second consultation that was mainly directed at the practicalities of its proposed approach: how would it work and when should existing contracts be brought within the new Fair Deal framework?
On 4 October 2013 the Government published its response to the consultation and brought New Fair Deal into immediate effect.
What are the requirements of New Fair Deal?
Where public sector staff are compulsorily transferred under TUPE from an organisation under the direct control of a Minister, the NHS, maintained schools or a central Government agency to a Provider, the Provider will need to adhere to the relevant public sector pension scheme. This will provide staff with continuity of pension provision, and remove the cost of providing a broadly comparable scheme from the Provider..
The same requirement will also apply where public sector staff are compulsorily transferred in any circumstances to a public service mutual or other form of public service structure.
Transferred staff will remain eligible to be members of the public service scheme for so long as they are continuously employed on provision of the outsourced service and for the duration of the outsourcing. This will include any future retender where the New Fair Deal requirements will need to continue to be met by the new Provider.
The outsourcing authority will have the obligation to make sure these terms are included in its outsourcing contracts. The Government intends that any breach of the participation agreement should give a right to the authority to terminate the outsourcing contract.
What will this mean in practice?
In order to give effect to these obligations the Provider will need to enter into a participation agreement with the relevant public service scheme and provide a list of staff to be covered by the protection to the scheme manager for the relevant public sector scheme. An agreement will be needed for each separate contract to avoid confusion over terms of participation.
In terms of employer and employee contributions, these will be set in accordance with the scheme rules of the relevant scheme. Providers should be aware that the policy does note the possibility that these rules will require higher contribution rates from private sector employers to reflect the higher risk of default when compared to a Government sector employer. The policy also provides for a potential exit payment for a Provider at the end of an outsourcing contract where the contributions it paid during the contract do not meet the liabilities accrued in the scheme. There is also possible provision for the scheme to demand additional payments where, for example, a private sector employer gives an excessive salary increase close to an employee's retirement to maximise their final salary based benefit. This issue will mostly disappear with the adoption of the new career average pension schemes in the public sector.
These issues may be mitigated somewhat as the policy also recognises that outsourcing authorities and Providers may wish to put in place agreements to deal with any changes in contribution rates and additional payments. This would mirror common practice in the LGPS with regards to cap and collar mechanisms and clearly apportioning exit liabilities.
Finally, as a participating body in the relevant public sector scheme, the Provider will have a number of information provision requirements applicable to it under the regulations governing the scheme.
Are there any circumstances where New Fair Deal won't apply?
For new outsourcings, the policy does recognise that in exceptional circumstances New Fair Deal may be inappropriate. If this is the case it will be necessary to consult with any unions and, in the absence of unions, with the staff to get their views on the proposal to disapply the policy requirements.
In any event, the effect of disapplying New Fair Deal will simply be to reinstate old Fair Deal and the requirement for a broadly comparable scheme so there are likely to be no financial benefits involved.
In some retendering cases there may be public tendering law issues for incumbents if they are required to meet New Fair Deal and where an incumbent has contractual issues in complying with New Fair Deal and this would impact on the equal treatment requirement for Government procurement. In these cases the incumbent may continue to provide a broadly comparable scheme instead of transferring staff to the public sector scheme. In exceptional circumstances to maintain this equal treatment all bidders could use broadly equivalent schemes.
When does New Fair Deal apply from?
The Government has stated that in most cases the New Fair Deal requirements should be applied with immediate effect. It does accept that certain contracts may be at such an advanced stage that it would be commercially difficult to adjust the agreements to reflect the new policy and so there is some wriggle room for this situation. In these cases old Fair Deal will continue to apply.
However, with effect from April 2015, New Fair Deal must be applied to all Government outsourcing contracts.
For local government contracts the Government intends that similar requirements should apply to New Fair Deal and these will be documented by the Department for Communities and Local Government (DCLG). In the interim the requirements of the Direction will continue to apply.
But what about...
- Existing contracts - subject to the issues noted above relating to procurement law, these should be renegotiated at retender to implement New Fair Deal.
- Pre-1999 contracts - the Government has stated that applying New Fair Deal on retender is a matter for the contracting authority to decide. Where provisions similar to Fair Deal formed part of the contract, the Government's steer is that these should be switched to reflect the new policy.
- Staff with pension benefits based on historical scheme structures - at retender these staff will be transferred into the open version of the scheme they originally left. Where the scheme in question is closed to future accrual then they will be put into the scheme which replaced it. Where the staff have a contractual right to a final salary scheme, but the only scheme they could join in the public sector would be a CARE scheme, then the Provider could meet its obligations via a broadly comparable scheme based on the scheme they were a member of immediately prior to being transferred originally. Although broadly comparable schemes do include provisions around transfer values, it will be interesting to see how any deficit in the schemes is dealt with where the majority of staff transfer back to the public sector.
- Staff who want to retain their benefits in their existing scheme - transfers into the public sector schemes will be optional in the same way that the original transfer of rights into the broadly equivalent scheme was optional. There will be no automatic transfer in these cases (or, indeed, at all).
- Further details of how this will work - the Government has published the New Fair Deal guidance to provide a framework for the new policy. It will be providing procurement guidance and has asked DCLG to produce an equivalent to New Fair Deal for local government contracts in the near future
Industry response to New Fair Deal appears to be generally positive, if muted. There is some surprise over how extensive the principles set out in the new policy will be - in effect applying to almost all Government outsourcing contracts across central and local government.
Providers that are coming up for retender may want to check what savings could be made where New Fair Deal applies, and some potential Providers may wish to reconsider whether it would pay to enter the outsourcing market.