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UK public sector pensions speedbrief: New Fair Deal - New NHS Guidance for Existing Contracts

  • United Kingdom
  • Pensions - Speedbriefs

01-10-2014

Further to the New Fair Deal guidance issued by HM Treasury in October 2013 (see our earlier Speedbrief here), the Department of Health (“DoH”) has just issued new guidance clarifying the policy position on opportunities to return ex-NHS employees to the NHS Pension Scheme (“NHSPS”) during an ongoing contract.

New Fair Deal envisages that there may be circumstances when former public sector employees could be allowed to return to a public service scheme apart from in a re-tender situation. Examples given in the guidance include situations where an existing employer is declared insolvent, where there is a change in ownership of the existing employer, or where employees are transferred to another employer as a result of the service being sub-contracted.

DoH has confirmed that it will consider such requests from employers under New Fair Deal on a contract-by-contract basis, taking into account the impact on staff, procurement and value-for-money considerations, among other factors.
Any such requests will need to be supported by the relevant contracting authority, which is likely to need to take its own legal and actuarial advice before it can support any request.

Future Service Issues

Only staff previously transferred out of the public sector under old Fair Deal who remain employed by the provider on the proposed date of transfer back into the NHSPS will be able to return to the NHSPS for future service. In general, participation will not be backdated.

DoH expects that any cost savings generated by allowing the provider to participate in the NHSPS (rather than continuing in a more expensive broadly comparable scheme) will be passed back to the NHS contracting authority and be fully reflected in lower contract charges. However, this would need to take into any account any bulk transfer shortfall funding arrangements between the provider and contracting authority (see below).

Past Service Issues

All staff who are re-admitted back into the NHSPS should be given the option (at their choice) to take a bulk transfer of their accrued rights in the provider’s broadly comparable scheme into the NHSPS, on the basis of a day-for-day (or actuarially equivalent) service credit. This transfer would include any service credits granted in the broadly comparable scheme where the member opted to transfer benefits out from the NHSPS under the old Fair Deal guidance at the start of the contract, as well as any benefits accrued during the term of the contract.

If eligible employees choose not to take up this bulk transfer option, their accrued benefits (and the associated past service liabilities) will remain in the provider’s broadly comparable scheme, as will any accrued benefits for staff who originally transferred to the provider at the start of the contract but who have since left employment or retired.
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Contracting NHS authorities should check if they have assumed any financial responsibility for such past service liabilities, and should also understand any possible consequences of the proposed arrangements with the provider as regards its broadly comparable scheme.

In particular, the authority will need to understand whether the provider’s broadly comparable scheme is in deficit, and whether an employer debt under section 75 of the Pensions Act 1995 might be triggered as a result of the proposal: for example, if the scheme is to be wound up or if the provider will no longer employ any active members in its scheme once the current active members are transferred back into the NHSPS for future service. Such liabilities can be significant and could impact the financial covenant of the provider: in extreme cases, they could result in insolvency.

The NHS contracting authority will need to provide the DoH with assurances that appropriate enquiries have been made and satisfactory responses have been given by the provider. In particular, the DoH will require assurance that the contracting authority is satisfied on the following points: the provider’s future covenant strength, how the provider will finance any contributions it may be required to make in respect of any bulk transfer (including any shortfalls which may arise), and the security of any accrued pension rights that will remain in the broadly comparable scheme.

Bulk Transfer Shortfall

Any bulk transfers from a provider’s broadly comparable scheme into the NHSPS would need to be fully funded.

In terms of assessing where liability for any bulk transfer shortfall should lie, there are potentially three different levels of bulk transfer terms, taking account of any relevant obligations in the existing service contract:

  1. The basic terms offered by the trustees of the broadly comparable scheme;
  2. The terms the provider may be required to offer under the existing service contract (or possibly under its undertakings to GAD) to meet the requirements of old Fair Deal. Commonly, these will be linked to the original bulk transfer terms from the NHSPS; and
  3. The terms now required by the NHSPS to provide the day-for-day (or equivalent) service credits if staff decide to transfer their benefits. These terms will need to be requested from the NHSPS actuaries.

The NHS contracting authority should review the terms of the existing contract with the provider to assess whether old Fair Deal applied and to check what (if any) exit provisions for onward bulk transfer terms were included. If the contract is silent, the guidance states that the contracting authority will need to meet any shortfall up to the bulk transfer terms under 2 above. If there is a further shortfall between the bulk transfer terms under 3 and the terms under 2 then the contracting authority and provider must agree on the funding of this shortfall to enable the bulk transfer to proceed.

When assessing whether or not to support the transfer application, the contracting authority will need to weigh up the costs it incurs in meeting any bulk transfer shortfall against the benefits to be derived from the future cost savings. The risks of a procurement challenge arising from the changes to the existing contract should also be considered, as well as the costs of actuarial, financial and legal advice.

Varying the Existing Contract

If the transfer is to go ahead, the existing service contract will need to be varied to document the cost savings due to the contracting authority and to take account of the necessary contractual provisions: for example, an obligation on the provider to obtain a pension direction enabling participation in the NHSPS, the bulk transfer process and a right of set-off in respect of unpaid future contributions to NHSPS. New NHS standard pensions drafting can be adapted to make these variations to the contract. DoH will require evidence that the existing contract has been varied appropriately.

Consideration also needs to be given to any employee relations issues, particularly if the terms of the NHSPS have changed since the staff originally transferred out (for example, due to the recent increase in member contributions into NHSPS). This will definitely be the case if the transfer back into the NHSPS happens after April 2015, when the NHSPS will switch to a CARE basis for future accrual. Providers will need to take advice on (for example) whether they should undertake formal consultation with employees over the change to future pension provision.

Comment

Eversheds are currently advising a number of clients on such proposals and the DoH guidance provides a useful summary of the key issues that need to be considered.

In practice, issues around shortfalls in the bulk transfer terms required by the NHSPS are likely to be a key factor in determining whether such applications will proceed. However, the future cost savings could be material. Also, achieving a transfer back into NHSPS before the end of an existing contract may also help to ensure a level playing-field for all bidders when the service provision comes to be re-tendered in due course, which is potentially helpful for both the contracting authority and the current provider.

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