Fair Deal is still on the local government agenda but implementation has been further delayed

The Ministry of Housing, Communities and Local Government has issued its long awaited response to the Fair Deal consultation we commented on in 2016

You can view this article again on our Insights page "A fair deal for pensions or an added complication"

Background

In 2016 the Department for Communities and Local Government (as it was then called) consulted on proposed amendments to the Local Government Pension Scheme (LGPS). Some of the amendments were intended to implement the reformed Fair Deal guidance in respect of compulsory transfers involving best value authorities and staff in the LGPS.

Revised Fair Deal guidance was issued in 2013 requiring staff compulsorily transferred from central government departments and agencies, the NHS and other parts of the public sector under the control of government ministers, to be given continued access to the public service pension scheme that they were eligible to participate in immediately prior to transfer.     

The Best Value Staff Transfers (Pensions) Direction 2007 currently applies when employees of English local and other best value authorities are compulsorily transferred to an independent provider delivering public services (a similar 2012 direction applies in Wales). This requires local and other best value authorities to protect the pension benefits of the transferring staff by the independent provider either becoming an admitted body in the LGPS or by the independent provider offering a pension scheme that is either broadly comparable to or better than the LGPS.

The proposal in 2016 was to amend the LGPS so that independent providers had to become an admitted body in the LGPS. This would remove the option for independent providers to offer a broadly comparable pension scheme on transfer, and would align with the principles set out in the revised Fair Deal guidance. 

Consultation outcome – Fair Deal

The Ministry of Housing, Communities and Local Government remains committed to introducing the Fair Deal principles into the LGPS. However, the intention is to commence consultation on new proposals, with a view to achieving Fair Deal in the LGPS by the end of the year.

A large majority of respondents to the consultation were supportive of the general policy aims, but there were significant reservations about how the proposed changes to the LGPS would deliver those aims.  

In our previous commentary we raised concerns that the proposed changes to the LGPS Regulations were not fully aligned with the revised Fair Deal guidance. There was no requirement on a second or subsequent generation transfer to put employees back into the LGPS if they currently participate in an incumbent provider’s broadly comparable pension scheme. Also the proposed changes to the LGPS Regulations extended the provisions to employers not currently caught by the revised Fair Deal guidance or the Best Value Direction.

Both these issues have been picked up in the consultation outcome.

Also highlighted in the responses received was the issue of ‘pass-through’ arrangements, with a number of respondents advocating the introduction of measures to open up tender exercises to smaller organisations that are unable to bear the risk of admitted body status in the LGPS. A ‘pass-through’ arrangement would effectively pass the pension risk to the commissioning authority, with the provider paying a fixed contribution rate to the LGPS. The consultation outcome states that further consideration will be given to this.

Consultation outcome – other proposed amendments

A number of other proposed amendments to the LGPS Regulations are being taken forward, with some revision to the drafting.

Helpfully for independent providers the Government intends to take forward the amendment to the LGPS Regulations so that it puts beyond doubt that an admission agreement can have retrospective effect. Some respondents were concerned that this would discourage prompt signature of admission agreements by scheme employers. This issue can be easily be overcome if a draft admission agreement is provided early in the tender process and signed at the same time as the contract for services.   
 
The proposed amendments to allow for exit credits to be paid to employers that no longer have active members in the fund will be taken forward, preventing a “trapped surplus” arising. The one month deadline for funds to repay the surplus has been extended to three months from the date of the exiting employer ceasing to be a scheme employer. This should be a positive change. Scheme employers will be able to recover any surplus so should have less concern with pension benefits being more generously funded upfront.

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

One of the proposals not being taken forward is the introduction of a new set of options for accessing benefits accrued through the LGPS’s additional voluntary contribution arrangements, to take advantage of flexi-access drawdown. It was decided that this would introduce substantial administrative complexities, and that members who wish to take advantage of flexi-access drawdown can continue to do so by transferring their AVC out of the LGPS.

It will be interesting to see what proposals are put forward in the next consultation on achieving Fair Deal in the LGPS.

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