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Health Legal Update: Update on NHS Outsourcing and Pensions

  • United Kingdom
  • Health and life sciences - Healthcare e-briefings


We have recently seen a significant increase in queries relating to the current state of play in relation to the treatment of pension rights on the outsourcing of NHS Services (or former NHS Services now being commissioned by local authorities). This briefing is intended to provide a general update on the position based on the limited information that is currently available.

Proposed changes to the NHS Pension Scheme

Despite recommendations made by Lord Hutton that private sector contractors should not continue to participate in public service pension schemes, the Government has decided to open unfunded schemes such as the NHS Pension Scheme, the Teachers’ Pension Scheme (“TPS”) and the Principal Civil Service Pension Scheme (“PCSPS”) to private sector contractors for the first time. The Local Government Pension Scheme (“LGPS”) has done this for many years.

The initial proposals for the reform of the NHS Pension Scheme issued in December 2011 stated that the Government had agreed to retain the HM Treasury Fair Deal for Staff Pensions guidance and extend access to public service pension schemes for transferring staff. All employees whose employment is compulsorily transferred from the NHS under TUPE (including subsequent TUPE transfers) will be able to retain membership of the NHS Pension Scheme when transferred. Similar statements were contained in the proposals for the TPS, PCSPS and LGPS. This principle was later confirmed in the final agreements for the schemes issued in 2012.

However no firm information was given how or when this change in policy would be implemented. In particular, it was not clear if the changes were linked to the NHS Pension Scheme reforms happening in 2015 or how the changes to the scheme would interact with changes to the Fair Deal guidance.

Fair Deal: a quick reminder

Fair Deal is non-statutory HM Treasury guidance originally issued in 1999 which sets out in general terms how pensions are to be dealt with when public sector employees are transferred to a private sector provider. The regime applies to both first and second generation transfers in relation to, broadly speaking central government departments and agencies, and the NHS. Local government now operates under a statutory best value direction which protects transferring employees’ pension rights.

Fair Deal requires transferred staff to be offered a broadly comparable pension scheme (or continued membership of the public service pension scheme where this was possible). Fair Deal also requires pension benefits accrued prior to the date of transfer to be protected by means of a bulk transfer option for staff who decide to transfer their public service pension benefits to the new scheme.

In March 2011, following the issue of the Independent Public Service Pension Commission’s final report, HM Treasury had issued a consultation paper on the future of Fair Deal.

Proposed Changes to Fair Deal

On 19 November 2012, HM Treasury published its response to the March 2011 consultation and provided further information following the statements made in the final agreements for the reform of the NHS Pension Scheme and other schemes.

The response document confirmed that the overall approach to Fair Deal will be maintained. However, going forward this will be delivered by offering access to public service pension schemes for compulsorily transferred staff. HM Treasury commented that this approach will both protect transferred staff as well as provide better value for money for the taxpayer and simplify the Fair Deal policy.

The response contained a draft of the new Fair Deal guidance. The new policy will apply to:

  • First generation transfers;
  • Second generation transfers (including transfers back into the public sector); and
  • Staff working for an incumbent contractor who retains a contract following a re-tender.

The new draft guidance will not apply to staff transferred out before the original Fair Deal came into effect in 1999. The original Fair Deal guidance will continue to apply until the new guidance comes into force.

Consultation on the draft guidance closed on 11 February 2013 and the new guidance has not yet been issued as at the date of publication of this briefing. However it is worth noting the following areas:

New Fair Deal: first generation contracts

The new draft guidance will continue to apply to the same staff covered by the current Fair Deal guidance. The draft guidance notes that access to the NHS Pension Scheme will cease to apply to a transferred employed if they stop working on the public service contract they worked on when they were transferred. Fair Deal protection will also cease to apply if an employee voluntarily chooses to move to a new role with different terms and conditions.

New Fair Deal: contract retenders

The new draft guidance makes it clear that a bidder for a contract with staff already covered by Fair Deal will have the option to:

  • Provide the staff with access to the NHS Pension Scheme, or
  • Continue to provide a broadly comparable pension scheme.

However, the bidder must adopt the same approach for all affected staff. Where the bidder opts for public service pension scheme route, the staff will join the scheme that is most appropriate to their employment. This may not necessarily be the public service pension scheme they were originally members of. This may be relevant for example where the commissioning of services has moved from the NHS to a local authority (or vice versa).

Where the bidder decides to offer their own scheme, this must be broadly comparable to the scheme available at that time to comparable employees in the public sector, for example, post 2015 a career average scheme. This will also be subject to any transitional protections that apply to that public service pension scheme.

New Fair Deal: bulk transfers

Where outsourced employees move back into a public service pension scheme, the draft guidance provides that a bulk transfer to the appropriate public service pension scheme will occur. The bulk transfer terms must ensure that each member has day for day (or equivalent) credits for all past service and will maintain a final salary link for benefits accrued in the final salary scheme. The terms will be set by the receiving public service pension scheme. Any shortfall in the transfer payment must be met by the contracting authority (not by the incumbent contractor). This approach reflects the requirements of the current Fair Deal guidance.

Approach of NHS Pensions

We therefore find ourselves in a period of limbo where proposed Fair Deal changes have been announced but not yet finalised. The reform of the public service pension schemes continues on a separate timetable.

However, NHS Pensions has confirmed that for the NHS Pension Scheme at least, once the new Fair Deal policy has been issued, private contractors will be able to access the scheme under a Direction Order issued under existing powers contained in Section 7 of the Superannuation (Miscellaneous Provisions) Act 1967. This is the basis upon which not-for-profit bodies are current admitted to the NHS Pension Scheme.

Direction Orders do not cover the separate (but related) NHS Compensation for Premature Retirement Scheme or NHS Injury Benefits Scheme. The new employer will have to make separate arrangements for injury benefits and early retirement benefits on the grounds of redundancy.


We are aware the procurement of some NHS service contracts are being currently being tendered on the basis that access to the NHS Pension Scheme is likely to be available by the time the service delivery commences.

The exact terms of the new Direction Orders and the precise terms of admission have yet to be clarified. This will be an area which private contractors will be very keen to understand to ensure that participation in the NHS Pension Scheme does not come with hidden risks or costs. However, the whole driver for the change in policy would appear to be to reduce the overall costs of future pension provision under outsourcing contracts.

It is hope that the new Fair Deal guidance will be issued as soon as possible to provide the clarity needed and to give NHS bodies and contractors alike the certainty to properly manage pension issues on NHS outsourcings.

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