· 2 min read · Features

Will Fair Deal for pensions survive the public-sector cuts?

Published:

For the most part it is not employment law that protects public-sector employees' pensions when they transfer to a private sector employer. The Transfer of Undertakings (Protection of Employment) Regulations 2006 (TUPE) do not require the new service provider to replicate their public-sector pension scheme. It is the contractual terms between the contracting authority and the service provider that impose the broadly comparable pension obligation on the new service provider.

The impetus for imposing this contractual obligation comes from Fair Deal. Fair Deal is government guidance that sets out the preferred treatment of pensions in public-sector outsourcing contracts. In England and Wales, for certain local authority contracts known as Best Value contracts, Fair Deal has a statutory underpin. The contracting authority must include the obligation to provide broadly comparable pensions in Best Value contracts.

However, even where there is no statutory requirement to do so, Fair Deal has been widely applied in public-sector outsourcing contracts. In Scotland, a similar approach is taken. 

How is broad comparability achieved at the moment?

Currently there are three basic models that are used in public-sector contracts to deliver broadly comparable pensions.  These are:

1 The service provider can deliver broadly comparable pensions through its own broadly comparable pension scheme

2 In local government contracts, the service provider can become an admitted body in the Local Government Pension Scheme.  The transferred employees continue to be pensioned through this scheme

3 The retention of employment model. This is usually restricted to services that are being outsourced from the NHS.  It is designed to allow NHS employees to remain in the NHS pension scheme

The mismatch between public and private-sector pensions

While the public sector has retained a plethora of defined-benefit schemes that are open to future benefit accrual, this is no longer the position in the private sector. A large proportion of private-sector defined- benefit pension schemes are now closed to new members and/or future benefit accrual. Many service providers argue that the current requirement for broadly comparable pension benefits is unsustainable.

 

The cost of service provision and the squeeze on pubic-sector spending

There is of course another reason why the current Fair Deal arrangements may be under threat: cost.

For the most part (although some types of benefits that are not regarded as old age, invalidity or survivor’s benefits are treated differently) the service provider can meet its TUPE obligations by providing a defined- contribution pension scheme with matching employee/employer contributions of up to 6% of salary. This is a much cheaper option than continuing to provide broadly comparable pension benefits.

Is Fair Deal likely to be made redundant?

With large-scale public-sector cuts on the horizon redundancy for Fair Deal cannot be ruled out? Part of the Hutton review of public-sector pensions is to consider the gap between public and private-sector pension provision. Many service providers would argue that that gap impacts on the sustainability of the Fair Deal obligation.

Since for the most part this broadly comparable pension regime is implemented entirely through guidance from a strictly legal perspective it certainly seems to be an easy target.

Other considerations

The public sector is highly unionised. The retention of broadly comparable pensions is high on public-sector unions’ agendas.  Industrial action may well follow if the Government (either north or south of the border) attempts to retreat from current practice.

An alternative

There is one more alternative that could resolve the issue of declining defined-benefit provision in the private sector. The rules of public-sector schemes could be altered to allow them to operate a similar model to the admitted route that is currently available in the Local Government Pension Scheme.

What offer will ultimately be made is anybody's guess.  What is clear is that for public-sector workers pension is a valuable benefit and that means the stakes are high.

Martha Quinn is head of the pensions team, Brodies LLP