Public Sector Briefing

The Public Sector Briefing takes a look at current issues of interest in public sector pensions.

In this Briefing:

• Public Service Pensions Bill
• Governance
• Fair Deal
  
• LGPS: Infrastructure Investments
• LGPS: Admission Agreements

Public Service Pensions Bill

• Once in force the Bill will create the unified legal framework underpinning the new public sector CARE arrangements, which have now been agreed in principle between the Government and unions.
• The Bill enables the making of the detailed regulations needed to flesh out the new schemes. The Bill picks up many of the Hutton Report’s other recommendations, for example, on strengthening scheme governance.
• The current drafting raises a number of technical issues and questions relating to, for example, the protections on accrued benefits, the “closure” provisions for the old public sector sections and the role of the Treasury in decision making for funding of schemes.

TPR oversight

• Under the Bill, TPR’s role will be expanded to cover public sector schemes for the first time. The new role will be supported by a reporting regime mirroring the existing private sector system.
• TPR’s powers will include the ability to appoint an appropriately qualified person to a scheme’s Pension Board, to issue improvement notices and to recover unpaid contributions.
• Codes of practice will be published on a range of topics, including internal controls, dispute resolution, disclosure of information and conflicts of interest. But, as drafted, TPR’s role does not appear to extend to investment functions.

Governance

• The term governance covers a range of measures dealing with effective administration and management. Committee constitution and structure, internal controls, conflicts of interest, record keeping and reporting are all governance issues.
• At the heart of the Bill’s new governance provisions are two new roles: the Pension Board and Scheme Manager. Overseeing
  these roles will be the relevant Government department or “Responsible Authority” which will have power to make regulations. For instance, the Department of Health will be the Responsible Authority in respect of the NHS Pension Scheme.
• The Bill specifies that Scheme Managers will be responsible for the administration and management of the scheme. In the context of the LGPS, this is intended to be the Administering Authority.

Pension Boards: general

• The Pension Board is responsible for assisting the Scheme Manager in “effectively and efficiently” preforming its role in compliance with relevant regulations and TPR.
• In the context of the LGPS, it is clear that the Government envisages that existing pensions committees may still be involved. However it is less clear how they will fit into the new prescribed structure and, particularly, how the conflicts of interest provisions are intended to work.
• The Bill does not make any express provision for member representation on Pension Boards but comments made at Committee Stage make clear that the intention is to take up Lord Hutton’s recommendations on this point. We anticipate this will appear in Regulations.

Pension Boards: knowledge .

• Again, mirroring the private sector, the Bill requires Pensions and understanding Board members to have an appropriate level of knowledge to enable them to properly exercise their functions on the board.
• The requirements are that Pension Board members are conversant with:

• the rules of the scheme; and
• with any document recording policy about the administration of the scheme which is for the time being adopted in relation to the scheme.

• Pension Board members will also be required to have knowledge and understanding of the law relating to pensions.

Fair Deal

• The Government confirmed that the Fair Deal will be retained, in its recently published response to the March 2011 consultation on this issue.
• Under the Fair Deal, companies taking on public sector work are currently required to offer transferring public sector employees “broadly comparable” DB arrangements.
• The Government’s draft guidance proposes that this will be replaced by a policy of allowing companies admission to the relevant public sector scheme, so that employees can continue membership of that scheme.

Existing Contracts

• On the retendering of existing contracts, the draft Fair Deal Guidance provides that contractors will have the option of retaining their existing arrangements or moving to the new access arrangements.
• “Broad comparability” will, in future, be tested against the benefit structure of the public sector scheme available to comparable employees in the public sector at the time of the re-tender and not (as currently) against public sector scheme’s benefits structure at the time of the original outsourcing.
• Companies with existing GAD certified broadly comparable schemes will need to check their contractual arrangements and their pension schemes’ governing documentation to ensure they permit these types of changes.
• The Consultation and Guidance do not apply to “Best Value” authorities (such as local authorities participating in the LGPS). We expect the DCLG to issue guidance to local authorities in light of the proposed new Fair Deal.

New Contracts

• The draft Fair Deal Guidance suggests the following approach for new outsourced contracts:

• transferring employees will be offered access to the public sector scheme relating to their former employer (the provider will effectively participate in the public sector scheme);
• it will no longer be possible for contractors to offer their own “broadly comparable” private pension scheme certified by GAD (unless retendering an existing contract);
• scheme specific mechanisms are to be adopted, for example, contribution rates will be decided by schemes (subject to Treasury consent);
• it will not be necessary to accept a transfer relating to the member’s past service into the broadly comparable scheme.

LGPS: Infrastructure Investments

• LGPS pension funds’ investments are subject to headroom limits
  based on the type of investment1. Infrastructure investments are often set up as partnerships meaning that the 15% headroom limit which applies to partnerships could restrict this option.
• As a way of removing barriers to LGPS investment in infrastructure, the Government has published a consultation proposing two options: increasing the partnership headroom limit from 15% to 30%; or adding a new infrastructure category to the list of limits.

LGPS: Admissions Agreements

• Admission Agreements allow private contractors to participate in the LGPS in respect of members transferred from the public sector.
• The Miscellaneous Regulations2 made the following amendments for Admission Agreements from 1 October 2012:

• it will no longer be possible for an admission agreement to cover more than one outsourcing contract;
• the distinction between transferee and community admission agreements will be removed. This means that the requirement to obtain a bond or indemnity will apply equally to both forms of admitted body; and
• in future, to address a loophole, a valuation must be made at the date an employing authority ceases to be a scheme employer in respect of the liabilities relating to its current and former employees.

• In addition, following changes to allow for auto-enrolment, contractors need to be careful that existing Admission Agreements permit only employees eligible for the LGPS to be auto-enrolled. See our Alert on this topic for more detail.

1 The Local Government Pension Scheme (Management and Investment of Funds) Regulations 2009, Schedule 1.
2 The Local Government Pension Scheme (Miscellaneous) Regulations 2012 (“the Miscellaneous Regulations”).