Is there really such a thing as a free lunch or a fair deal?

The Government has been teasing us for some time now with its plans to extend the Fair Deal to transfers of staff that involve the Local Government Pension Scheme (LGPS). 

The Government announced in April 2018 that they would release new proposals at the end of 2018 and so, as we stretch in 2019, we now have the new consultation proposals.  The consultation period lasts until Thursday 4 April so plenty of time to read and digest the 24 pages of this document should you wish!

If this is not top of your reading list, this briefing will give a flavour of the document, issues to look out for and information to note.  

The essential message to be gleaned is that, for many, the changes are not earth-shattering nor particularly earth-shifting.  There is some tinkering around the edges with some more important aspects to note when it comes to asset and liability transfers. 

Who’s in and who’s out? 

Admission bodies (housing associations, health and social care providers etc.) will not be included in any attempts to extend the Fair Deal under these proposals.   For academies and local authorities, the position will not change; academies are already covered, and the protection offered to local authority employees from the Best Value Staff Transfers (Pension) Direction 2007 is very similar to that offered by Fair Deal.   One change is that contractors won’t be able to offer a broadly comparable scheme – they will need to offer continued membership of the LGPS to transferred staff.

Deemed employers

Also proposed is the introduction of the concept of ‘deemed employers’, which seeks to address the pitfalls of transferring employees who are LGPS members, most frequently, as part of outsourcing agreements.  The Government’s proposal states that, under this option, the transferring employer of LGPS members will keep the responsibility for the LGPS and so be the “deemed employer” of the transferring members.  This change could do the following:

1) reduce the uncertainty regarding liabilities and responsibilities of the pension scheme for the new employer when receiving employees with LGPS pensions;

2) negate the need for an admission agreement; and

3) give the employees additional comfort; history suggests that local authorities are a safer bet when it comes to keeping pension promises when compared with the private sector.    

Currently, the transferring local authority and the transferee (be it a housing association, cleaning company or IT provider), typically agree allocation of risks relating to the LGPS as part of the service contract, and we expect to see this continue.

Transferring pension assets and liabilities

Chapter 3 of the consultation is a more significant change and is worth noting.  The Government is proposing that, where organisations merge or are taken over, all pension assets and liabilities become the responsibility of the new employer.  This, as with many things of life, has its pros and cons! 

Example one

If two housing associations merge and all the employees of HA One (who are LGPS members) transfer to the employment of HA Two, then participation in the scheme ends, and an exit payment is triggered to be paid by HA One.  If the Government’s transfer proposals are accepted, the exit payment would not be triggered, and so HA One would not be saddled with a hefty pensions payment.  All good news so far! 

Example two

For an academy, the position isn’t so positive.  If a poorly performing academy is ordered by the Department for Education (DfE) to combine with its high-performing neighbour and transfer all its staff, this would usually trigger an exit payment that would be underwritten by the DfE.  However, under the new proposals, the assets and liabilities for the LGPS staff would transfer to the successful academy.  Ultimately, the DfE will still be picking up the bill but this way it will be doing so by virtue of the funding that the successful academy continues to receive.  Academies who are assuming responsibility for other academies under re-brokering agreements will need to be aware of this transferring liability.

Example three

If a local authority has contracted out its boiler repair service for its housing stock and the contractor becomes insolvent, where the insolvent contractor is taken over by a new contractor, the new contractor may well need to take on responsibility for the pension assets and liabilities of any employees who are part of the LGPS scheme.  Taking on such a risk might reduce the pool of would-be new contractors.  Any company willing to tender for such a contract would, in most cases, want an iron-proof indemnity from the local authority as comfort against the risk of such a transfer.

If you would like to participate in the consultation you can do so here.

Further information

If you require help, please get in touch with your usual contact in our Employment and Pensions Team or contact Doug Mullen.