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A fair deal for pensions or an added complication?

The Department for Communities and Local Government unveiled its consultation on implementing the reformed Fair Deal in the Local Government Pension…


The Department for Communities and Local Government (DCLG) recently unveiled its long-awaited consultation on implementing the reformed Fair Deal in the Local Government Pension Scheme (LGPS). The consultation closed on 20 August 2016.

“A Fair Deal for Staff Pensions: staff transfers from central Government” (New Fair Deal) was the revised guidance issued in 2013 to central government departments and agencies, the NHS and other parts of the public sector under the control of government ministers. On compulsory transfers under New Fair Deal transferred staff have to be given continued access to the public service pension scheme they participated in immediately before transfer.

This is in contrast to the Best Value Staff Transfers (Pensions) Direction 2007 (Best Value Direction), which requires local and other best value authorities to ensure that the pension benefits of transferring staff are protected by the contractor either becoming an admission body in the LGPS or the contractor offering a pension scheme that is either broadly comparable to or better than the LGPS.

The Fair Deal changes

Under the consultation, DCLG is proposing to remove the option for contractors to provide a broadly comparable pension scheme on transfer. In line with New Fair Deal, contractors will be required to become an admission body in the LGPS. The Best Value Direction will then be revoked in due course.

The proposals amend the LGPS Regulations by introducing a new category of employee, known as a “protected transferee”, and a new category of scheme employer, known as a “protected transferee employer”. A “protected transferee employer” will be required under the LGPS Regulations to enter into an admission agreement with the administering authority of the LGPS fund that the employees participated in immediately before being compulsorily transferred. The two exceptions to this are where:

The new employer already participates in a public service pension scheme, such as on local authority staff transferring to an NHS body. In such transfers, DCLG presumably expects that the transferring staff will be provided with membership of the NHS Pension Scheme.

The new employer is a “designation” body, so is required to designate which of its employees are eligible for LGPS membership. In this case, rather than entering into an admission agreement, the new employer under the amended LGPS Regulations will be required to designate protected transferees as being eligible for the LGPS.

But do the draft provisions fully align with New Fair Deal?

In a number of respects, the proposals are not aligned. For example, there is no requirement on a second or subsequent generation transfer to put transferring employees back into the LGPS if they currently participate in an incumbent contractor’s broadly comparable pension scheme. This is out of step with New Fair Deal.

The consultation document suggests that it would require explicit statutory powers for local government to require employers on a retender to return the relevant transferring employees to the LGPS if they moved out of the scheme under an earlier transfer to which the Best Value Direction applied. On a retender where employees currently participate in the incumbent provider’s broadly comparable pension scheme, new providers can access the LGPS should they wish to do so by seeking admitted body status, but there will be no requirement for them to do so.  

The provisions also seem to extend to employers not currently caught by New Fair Deal or the Best Value Direction. “Protected transferees” covers all LGPS active or eligible employees who are employed by scheme employers or admission bodies (excluding the police and higher education employers), and who are compulsorily transferred to a different employer who does not offer membership of a public service pension scheme. This is wide enough to catch existing admission bodies that would ordinarily be outside the scope of New Fair Deal and the Best Value Direction. Was this what was intended?

It will be interesting to see whether these proposed amendments to the LGPS Regulations are revised and refined now that the consultation process has come to an end and once the feedback is evaluated.

Other changes being proposed  

As well as amending the LGPS Regulations to implement New Fair Deal, the consultation sets out a number of other proposed changes to the legislation in relation to the Government’s policy on pensions freedom and choice and also to address issues of good stewardship of the scheme. The main changes being proposed are:

The regulations will be expressly amended so that it is put beyond doubt that an admission agreement can have a retrospective effect. This will be an important and helpful change for contractors when entering into service contracts where it has not been possible to get the admission agreement in place before the services are transferred over or where the transfer date has had to be delayed due to getting the admission agreement in place.

A new set of options for accessing benefits accrued through the LGPS’s additional voluntary contribution arrangements. A member with such benefits will, depending on when they access those benefits, have the choice to use them for one or more lump sums, to purchase additional pension, to purchase an annuity or to transfer the benefits into another appropriate pension arrangement (e.g. to take advantage of flexi-access drawdown).

The regulations will be amended to allow for exit credits to be paid to employers that no longer have active members in the fund. This will mean that where a surplus is revealed on an exit valuation, the fund will be required to pay that surplus to the exiting employer within one month of the exiting employer ceasing to be a scheme employer (or such longer period as is agreed). This is positive for scheme employers, in terms of preventing a “trapped surplus” arsing in the fund. However, it will mean that administering authorities can reasonably require scheme employers, and particularly admission bodies, to generously fund their pension liabilities upfront.

The requirement for employer consent to early retirement will be removed for deferred members whose pension benefits were earned under the 2008 scheme and who retire between the ages of 55 and 60. As these benefits are actuarially reduced they are cost-neutral to the fund, so there is no need for the consent requirement.      

We can assist local authorities, other best value authorities, and contractors with all aspects of public sector outsourcing arrangements and participation in public sector pension schemes.

For further advice on any issues relating to pensions, contact our pension solicitors.

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