Introduction of New Fair Deal to the LGPS

A government consultation proposing several changes to the Local Government Pension Scheme (LGPS) closed before Christmas. In it, the government sought views on introducing “New Fair Deal” protections for workers whose jobs are outsourced to third-party providers. The aim being to give outsourced workers clearer, stronger and more consistent pension protection and to simplify the pensions risk elements of any outsourcing projects by introducing a consistent approach 

As it currently stands, outsourced workers are protected by the Best Value Direction 2007, which would cease to exist as part of these proposals with future outsourcings being dictated by the requirements of New Fair Deal. 

For those involved in procurement and HR, the proposed changes will not just impact legal considerations on outsourcing but will also impact commercial decision making such as pricing, risk allocation, contract design and engagement with bidders. 

What are the proposed changes?

Outsourced Staff Remain in the LGPS

At present, when local authority staff are outsourced, the contractor may provide that the transferring staff remain in the LGPS, or a broadly comparable pension scheme.

Under proposed changes, outsourced staff will remain in the LGPS through the ‘deemed employer approach’ and the broadly comparable scheme option will no longer apply (expect in exceptional circumstances). The outsourcing local authority would remain as the ‘deemed employer’ for pension purposes in the LGPS, but the contractor would be the legal employer in all other employment respects. 

These changes will dispense with the need for admission agreements, with the intention being to reduce the administrative burden and delays in the procurement process associated with drafting, agreeing and entering into admission agreements whilst also eliminating the need for complex actuarial comparisons and evaluations.

That being said, without a document clearing setting out the agreed position between the Administering Authority, the outsourcing authority and the contractor, it is questionable the extent to which the administrative burden will be relieved as much of this information will still need to be sought  and recorded by the Administering Authority who will not generally be a party to the outsourcing contract. Therefore, it may be that a simple agreement documenting admission to the scheme, compliance with the regulations and paying contributions will still be required for the sake of transparency. 

The Option to Provide Access to the LGPS for New Starters and Protected Transferees

Currently, staff hired by contractors after the outsourcing takes place will not usually be provided with access to the LGPS unless the contractor has entered into an open admission agreement. As part of these changes local authorities could choose to extend LGPS access to all staff working on the contract (including new joiners) which would avoid the common issue of a two-tier workforce being created. But this would be a once and for all decision i.e. second round outsourcing would also have to abide by this.

This will  have an impact on the longer-term contract costs for bidders who may need to provide access to the LGPS for a greater number of workers over a longer duration, so in reality it maybe little used. Ultimately this will need to be  determined in advance of commencing any tender  and  set out in any tender documentation.

New Fair deal will apply on retenders of existing contracts and if parties agree it can be applied voluntarily to any current contracts .

Individuals will retain LGPS eligibility as “protected transferees” so long as they remain working “wholly or mainly on the outsourced activities”. This would become a relevant consideration on any second stage transfer.

Responsibility for Pension Costs

The proposals clarify that the contractor will be responsible for the normal pension contributions and that the outsourcing local authority will be on the hook for the long-term pension risks (i.e. deficits).

By determining a set risk sharing mechanism or ‘pass-through’ arrangement, there should be greater certainty surrounding pensions costs which should enable bidders to price more accurately and reduce their reliance on risk premiums in pricing models. 
 
However, there are still some points that will need to be agreed, and this mainly relates to whether the contractor’s contribution rate will be ‘fixed’ or ‘floating’. There also remains some uncertainty as to whether the new proposals will essentially constitute a ‘national pass-through structure’ or if local variations via current fund pass-through structures will continue to apply, as well as issues around ill health and redundancy cost allocation.

What do I need to do next

The government’s response is now awaited. If and when the changes come into play, there will be a short implementation period (around six months) to allow time to prepare for the changes. 

However, as always, early planning is essential and local authorities, and in particular, HR and procurement teams, should start considering some of possible impacts and actions now.

• Review the consultation and draft regulations: Whilst the proposals are subject to change, we anticipate that the overarching policy intention will remain the same. Authorities should familiarise themselves with the proposals   and consider if training in the interim will help to prepare for the implementation.
• Understand current outsourcing terms: Contracts and tender documents will need to be updated if and when the changes come into force. Terms surrounding access to the LGPS, the approach to protected transferees, and contribution rates will need to be considered. 
• Consider how the changes may impact pricing models: The proposed changes will undoubtedly impact future tender pricing and the markets engagement with pension costs.
• Future planning: As we get further detail on the proposals and implementation timelines authorities will need to consider whether any pipeline procurements and re-tenders will be impacted. 

We have also provided our own thoughts in response to the consultation. If you would like to see our response and/or if you would like to discuss the changes in more detail and how they may impact your organisation, please contact a member of our Pensions Team.

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