"More commercial" Fair Deal for public sector pensions could open up more outsourcing opportunities to SMEs, says expert

The Treasury's new guidance on the policy, which has immediate effect, will allow outsourced employees of central government departments, the NHS and other parts of the public sector to remain members of a public service pension scheme after transfer. Previously, private sector providers had to guarantee to provide those employees with a "broadly comparable" pension scheme. Public sector pension schemes including the Principal Civil Service Pension Scheme (PCSPS) and the NHS Pension Scheme will now be opened up to private sector providers for the first time.

Pensions expert Nick Stones of Pinsent Masons, the law firm behind Out-Law.com, said that the previous arrangements had created "barriers" preventing small and medium-sized enterprises (SMEs) from entering into outsourcing arrangements with the public sector.

"SMEs were unlikely to have the ability to set up a 'broadly comparable' scheme, as required by the original Fair Deal, or to be able to take on the financial risks of such a scheme," he said. "In practice, this meant that outsourcing opportunities were restricted to larger companies with more resources."

"The new guidance could create more scope for private sector firms to do deals with contracting authorities, and could make outsourcing much more straightforward. Contractors will still have to guarantee that outsourced staff have access to good quality pensions, but they will not have to take on as much financial risks or deal with as many operational complexities," he said.

However, he said that the guidance was not clear on how to deal with "legacy problems", such as how to manage the transfer of outsourced employees back into a public sector scheme if the benefits available under that scheme had since deteriorated. Staff that have already transferred out of the public sector under the old Fair Deal policy will generally be entitled to return to their old public sector pension scheme when their contracts are retendered, although contracting authorities will be able to consider these arrangements on a case by case basis.

The Fair Deal policy provides that staff whose roles are outsourced to the private sector will continue to receive similar pensions to their public sector colleagues. It applies when staff are transferred out of central government departments, agencies, the NHS, maintained schools which are not covered under local government arrangements and other parts of the public sector under the control of government ministers. It does not apply to local government employees, which are subject to separate statutory arrangements.

Under the guidance, the new Fair Deal applies when staff who are members of a public service scheme are transferred to an independent contractor under the Transfer of Undertakings (Protection of Employment) Regulations (TUPE). It will also apply if staff are transferred to a public service mutual or other new models of public service delivery, whether or not TUPE applies. These staff should continue to be members of the public service scheme they were members of immediately before transfer, subject to the eligibility criteria of that scheme.

Transferred staff will continue to be eligible for membership of the public service pension scheme as long as they remain continuously employed as part of the outsourced service. They should also continue to be eligible following any subsequent compulsory transfer. Employees that were eligible to be members of the public service scheme before transfer but were not active members should continue to be eligible to join the scheme post-transfer, as long as they are enrolled back into the scheme on the day the new employment begins.

According to the guidance, employers may be allowed to continue to offer a 'broadly comparable' scheme, as under the original Fair Deal, instead of access to a public service scheme, in certain circumstances. These include where the current contract holder has a contractual obligation to offer this scheme, or where procurement law prevents the contracting authority from requiring the bidder to offer access to the public sector scheme.

The final guidance also extends the right to participate in a public sector pension scheme to staff at maintained schools, including academies, unless covered under local government arrangements. Pensions expert Nick Stones said that this change, which was not proposed as part of the Government's consultation exercise, could prove difficult to enforce.

"Fair Deal is not the law, but rather a statement of good practice; and it is expensive to comply with," he said. "This is easy to enforce where contracts are controlled by central government, where funding can simply be withdrawn in cases of non-compliance, but it remains to be seen how autonomous academies will implement the policy."

Stones also pointed out that the revised Fair Deal could make work for central government more attractive than work for local government to charitable and not-for-profit bodies. This was because these entities would be taking on a smaller share of the risks of providing employee pensions under the Fair Deal than under the Best Value guidance, which governs the participation of contracted-out employers in the Local Government Pension Scheme (LGPS).

"Employers can address these risks as part of the outsourcing contract, if they have the commercial savvy to do so," Stones said. "However, this is less likely to be the case where charitable and not-for-profit entities are concerned."

The new guidance comes into immediate effect and should be reflected in procurement practices as soon as possible, unless adopting it where an existing procurement is already at an advanced stage would cause the contract to be terminated or delayed. In these cases, the old Fair Deal guidance should continue to apply. It must be followed in all cases from April 2015.