The Department for Communities and Local Government's ("DCLG") consultation on the application of the principles set out in the October 2013 New Fair Deal guidance (the "New Fair Deal") to the local government sector is nearing an end.

In broad terms, the draft amendment regulations (the "Draft Regulations"), which amend the Local Government Pension Scheme Regulations 2013 (the "2013 Regulations"), require employees who are compulsorily transferred from local authorities and other employers listed in the 2013 Regulations are to be given continued access to the LGPS.

Access the consultation document and the Draft Regulations here.

The consultation will close on 20 August 2016. With less than a week left to respond, we set out below a brief summary of the key changes proposed by the consultation in relation to the New Fair Deal principles and those points which respondents may wish to consider when formulating a response to the consultation.

The most significant changes to the current framework proposed by the consultation are outlined below:

  1. Transferring employees must have access to the LGPS: a new category of employee and employer are to be introduced: a "protected transferee" and a "protected transferee employer".

    A protected transferee employer will be required to enter into an admission agreement to provide all protected transferees with access to the LGPS. The option for a contractor to offer membership of a broadly comparable scheme will be removed. Any compulsory transfer of a protected transferee to a different employer will trigger the new provisions. Any transferring employees who are eligible for the LGPS but did not join prior to their transfer will remain eligible to join the LGPS post-transfer.
  2. Obligation does not extend to the re-tender of a contract where the incumbent contractor has a broadly comparable scheme: on a re-tender of a contract where employees have already been transferred out to a broadly comparable scheme, it is proposed that the new employer (or incumbent contractor) would not be required to participate in the LGPS (though such an employer could choose to seek admission). This is contrary to the New Fair Deal. The consultation states this is because of the difficulty of legislating for a bulk transfer of accrued rights from the broadly comparable scheme to the LGPS. The consultation asks for views on whether this is the correct approach; this position could therefore change.
  3. Return of surplus funds on exiting the LGPS: where an employer exits the LGPS because they no longer employ any active members, the LGPS will be required to pay a credit to the employer if there are surplus assets in respect of the employer's notional LGPS fund.

The Draft Regulations also propose various 'tidying up' amendments to the regulations governing the LGPS, including options for using additional voluntary contributions.

Key considerations in formulating a response to the consultation

Set out below are the points which, in our view, contractors and other respondents may wish to consider when responding to the consultation:

  1. Employees already a member of a broadly comparable scheme: the requirement to provide access to the LGPS will apply to all first generation transfers (except if it would result in an individual bidder being materially disadvantaged to the extent they would not have a fair prospect of success in the procurement process) but will only apply to a re-tender of an existing contract if the incumbent contractor was an admission body. Re-tenders where the incumbent contractor has a broadly comparable scheme are not covered by the Draft Regulations. This is inconsistent with New Fair Deal and continuing to have two different regimes is not desirable. Where the regimes overlap, this could cause further difficulty. 
  2. Direct statutory protection: the consultation envisages the implementation of the New Fair Deal principles through the Draft Regulations, which hard-wire the protection into legislation.  This is in contrast to other public service pension schemes, where the regulations set out the mechanism by which the pension protection is to be provided, e.g. Direction Employers in the NHS Pension Scheme. For these (non-LGPS) schemes, the legal requirement to provide the pension protection contemplated by New Fair Deal is only a contractual and not a statutory obligation.

    The Draft Regulations therefore potentially put contractors at risk of being subject to overly prescriptive requirements. It also means that even though a contract with a new employer may not reference the New Fair Deal obligations, the new employer will nonetheless be subject to these requirements. In hard-wiring the protection, the Draft Regulations essentially create a new form of statutory pension.
  3. Risk: the proposals do not alter the fact that an LGPS admission body remains responsible for the financial consequences of participating in the LGPS (e.g. varying employer rates, early retirement strain and exit payments). This risk is exacerbated if the contracting authority does not provide adequate information to bidders early on in the tender process. It is also arguable that the contractor's bargaining power is weakened as a result of the statutory nature of the obligations.
  4. Wide definition of "Protected Transferee": the proposed definition of "protected transferee" is wide. There is no distinction made between employees who transferred from local government and are active LGPS members and new employees of admission bodies, who have simply been offered LGPS benefits. There is also no consideration of the background to the admission body and whether that body would be caught by the principles of New Fair Deal on a compulsory transfer of staff.

    There are admission bodies with no connection to a public sector contract, for example charities (admitted under the former communities admission body regime), who would be outside of the requirements of New Fair Deal but are covered by the proposed provisions. Staff compulsorily transferred from such bodies, on an outsourcing or business sale, would be covered by the proposed provisions which are therefore broader than envisaged by New Fair Deal.
  5. Two regimes under the legislation: it seems that the existing category of admission body under paragraph 1(d) of Part 3 to Schedule 2 (a body that provides services as a result of a transfer of the service) is similar to the proposed definition of protected transferee employer. Further clarification on whether this category of admission body status will still be awarded e.g. on a re-tender where the incumbent had a broadly comparable scheme would be helpful and also whether all provisions that apply to 1(d) admission bodies will also apply to protected transferee employers, for consistency.

The consultation raises several points which will affect organisations that enter into, or are party to, contracts involving local government employees. Please contact us if you would like to share your thoughts or to discuss any of the points above in more detail. We will send a full update when the consultation response is announced and final regulations are laid.