Consultation on introducing New Fair Deal into the Local Government Pension Scheme

What are the key reforms to the LGPS proposed in the government’s consultation and draft Local Government Pension Scheme (Amendment) Regulations 2019?

18 March 2019

On 10 January 2019, the Ministry of Housing, Communities and Local Government published a new consultation paper on bringing New Fair Deal principles into the Local Government Pension Scheme (LGPS), together with draft regulations. The paper also includes proposals introducing ‘deemed employers’ and reforms to the way mergers and takeovers of LGPS scheme employers affect exit payments.

The consultation paper seeks to address concerns raised during a 2016 consultation under which the government first proposed introducing New Fair Deal principles and replacing the current protection offered by the Best Value Authorities Staff Transfers (Pensions) Direction 2007, and Welsh equivalent.

Incorporating New Fair Deal into the LGPS

Under the proposals, local authority and other protected staff that transfer to private sector bodies must be provided with continued membership of the LGPS rather than a broadly comparable scheme. The aim is to afford more protection to staff who are compulsorily transferred to private sector companies following an outsourcing (the LGPS being assumed to provide better security for members than private sector pension schemes). The protection will apply even if the service is sub-contracted or transferred out again, so long as the employees remain employed on the delivery of the service or function transferred.

Responses to the 2016 consultation expressed concern that the 2016 proposals protected future employee transfers but not employees who had been previously transferred and enrolled in a broadly comparable scheme. However, the new proposals provide that when past service contracts are next re-tendered, the transferred staff will become 'protected transferees' under the LGPS Regulations and gain a right to membership of the LGPS. These employees will also have the right to transfer their accrued benefits from the broadly comparable scheme to the LGPS. It will be important for contractors who participate in broadly comparable schemes to consider the impact of this change.

Risk Sharing and ‘Deemed Employers’

The government is also proposing an option whereby contractors need not become admission bodies in the LGPS and no admission agreement would be needed; instead, the outsourcing authority could decide to take on 'deemed employer' status. The result would be that, for transferring staff, their 'scheme employer' for pension purposes would not be their new private sector employer but would remain as the outsourcing authority. The old employer would retain the main scheme employer responsibilities such as making pension contributions and taking on funding risk. However, the parties could contractually agree to share and allocate pension risk in whatever way is commercially preferred.

The 'deemed employer' proposal aims to allow outsourcing authorities greater flexibility when transferring services to external providers, maintain continuity for LGPS members and allow small and medium-sized contractors to tender for contracts where previously they would have been deterred by the pension risk. The government also sees it as a method to limit the numbers of scheme employers, relieving some administrative burden on LGPS pension funds. The proposal may, however, result in some increased complexity for funds as, in practice, funds may end up having to communicate with two employers rather than one in order to administer benefits.

Mergers and Takeovers

Under the current regime, when an LGPS scheme employer ceases to employ active members an exit payment may be triggered. The consultation paper proposes that when a scheme employer is 'merged into', or 'taken over' by, another body, the responsibility for the former employer’s pension liability transfers automatically to the successor body, thereby avoiding any exit payments. The government considers that these proposals should allow mergers and takeovers to occur efficiently, without unintended exit payments being triggered. However, in our view, the terminology used in the draft regulations is not clear and may lead to uncertainty around when the provisions should apply. Also, the removal of any fund discretion to require an exit payment may be problematic in some circumstances.

We would hope that this aspect of the government proposal will be developed further before any implementation of the draft regulations.

This article was written by Ed Curtis (Associate) and Ellie Alveyn (trainee solicitor).

Please contact the pensions team or your usual Burges Salmon contact with any questions.

Key contact

Michael Hayles

Michael Hayles Partner

  • Pensions
  • Public Sector Pension Schemes
  • Financial Services

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