The rules govern the treatment of pensions for staff who are given access to their old public sector scheme when they are compulsorily transferred into the private sector. These represent a considerable easing of the previous Fair Deal and set out the Government’s pension requirements for private sector contractors that take on either:
- First-generation contracts: those where public sector workers are being outsourced to the private sector for the first time; or
- Second-generation contracts: where former public sector workers are employed by an incumbent contractor, these workers having already been outsourced to the private sector.
The previous position required a private sector contractor to set up a broadly comparable defined benefit pension scheme to the Principal Civil Service Pension Scheme (PCSPS), and National Health Service Pension Scheme (NHSPS) or other unfunded arrangement. This was designed to provide similar benefits to those previously accrued in the public sector scheme.
Now, workers will stay in their current public sector scheme, provided a minimum of 50% of their time is spent on the contract services. Private sector employers will effectively be admitted into the public sector scheme, and become a participating employer. Their contribution rate is intended to be the same as for existing public sector employers – currently 14% of pensionable pay for the PCSPS – though much lower than typically applies in a private sector scheme. There will be no need for bulk transfer, nor will there be any deficit at the end of the contract.
This is a very welcome development for many private sector contractors as they will not have to concern themselves with the new defined benefit (DB) liabilities, pension deficits and future bulk transfer value issues or end of contract shortfalls. During the course of a contract, the cost of providing DB will be more or less fixed, with the difference being the contribution rate subject to review at subsequent actuarial valuations of the relevant public sector scheme. However, this removes much of the uncertainty and all of the volatility.
The major difference here is that at the end of the contract, the default option will be for individuals to transfer back to the public sector scheme, provided they meet the same 50% contract time requirement. The member will join the section of the scheme that they would have been in had they remained in the public sector.
The broadly comparable scheme will only be an option in certain exceptional circumstances.
The employer will have to effect a bulk transfer into public sector pension arrangements for those members who consent to transfer their past service rights. Only active members will transfer back, with the contractor keeping deferred members and pensioners.
The main concern for an incumbent contractor will be the bulk transfer, irrespective of whether it retains the contract when it is re-tendered. If the broadly comparable scheme was underfunded, this would require top-up payments to be made. However, the contractor won’t be liable for any further pension liabilities at the end of the contract.
It is not clear what assumptions would be used to calculate a bulk transfer, particularly where the exit terms are unclear, though this lack of clarity is the norm rather than the exception.
Uncertainty also exists in relation to contracts first outsourced before the old Fair Deal applied. Though moving back to the public sector is the default position, it is not clear how any exceptions will be agreed.
The current guidance states that existing contracts will continue with the current pension arrangements until contract renewal. Whether an employer could request that employees are allowed back into the public sector scheme mid-contract is not totally clear, and we await further developments on this front.
Private sector contractors welcomed the new Fair Deal, as it should remove some of the risk and uncertainty from contract negotiations. This will help to create a more level playing field.
Know where you stand
Although these rules are not yet fully in force, they must be applied to every contract from April 2015, so employers should start to familiarise themselves with the implications now.
The PCSPS has already implemented the new Fair Deal and the NHSPS is expected to follow in the near future.
The Local Government Pension Scheme (LGPS) already allows private sector employers to become an admitted body, but it remains to be seen whether this will be mandated in the future.
The Government has an objective of increasing the number of service providers to the public sector, and is particularly keen to encourage smaller employers, who previously felt excluded by onerous pension obligations.
Detail on the new guidance can be found on the Government website: www.bit.ly/fairdealguide
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