Public Sector Briefing

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

In this Briefing:

• Update on LGPS
• The Fair Deal
• Governance of public service pension schemes
• Death or ill health benefits
• Misstatement
• Pensions liberation

Update on LGPS

The Local Government Pension Scheme Regulations 2013 are the culmination of more than two years discussion and consultation following the 2011 Hutton Report, and implement the changes agreed with the unions and others.

From 1 April 2014:

• LGPS will move from final salary to CARE, with an accrual rate of 1/49ths (increasing from 1/60ths) and CPI revaluation. In addition, each member’s NPA will be tracked to their SPA, rather than a set age of 65.
• Contributions will be banded, with average member contributions remaining at 6.5%, but the rate will be by reference to actual pay (rather than part-time contribution rates being determined on full time equivalent pay). The intention is that lower-paid members will pay the same or less than they now do.
• Rather than opting out of the scheme, a member may choose the new 50/50 option -paying half contributions for half the pension (but the full value of other benefits).
• Benefits for service prior to 1 April 2014 will be protected based on final salary and current NPA, and a statutory underpin will protect members within ten years of their NPA on 1 April 2014.

The Fair Deal

The new Fair Deal was published on 8 October 2013. It represents a major departure from the previous policy on how pensions are handled on public sector outsourcings.

The new guidance has immediate effect but there is a transitional period of “grace” for projects which are already at an advanced stage and where it is not viable to implement the new policy. In these cases the old Fair Deal policy will continue to apply but there is a long-stop date: the new Fair Deal guidance must be followed in all cases from April 2015.

New policy

The new policy opens the doors of public sector schemes (in many cases for the first time) to private employers who inherit staff compulsorily transferred out of the public sector. The aim of allowing private sector employers to participate in public sector schemes is to improve competition, as a private sector employer will no longer have to set up and run their own, costly, broadly comparable DB scheme.

Risks for contractors

The change in policy is likely to be welcomed by companies tendering for Government outsourcing contracts, particularly those who have found the requirement to provide their own DB scheme a real deterrent.  However, the guidance is less than reassuring that the terms of participation will be risk free – so it will be essential for bidders to mitigate these risks in the commercial agreement with the contracting authority.

While the starting point appears to be that private employers will pay the standard employer contribution rate for that scheme, the guidance is equivocal on this point.  Early signs are that some of the financial risks and obligations which we are used to seeing admitted bodies grapple with in the LGPS are likely to apply to participation in other public sector schemes. In particular, an exit payment may be charged to an employer if the liabilities attributable to it “have not been met by the contributions paid up to that point”.

Retenders

The policy is more complex for re-tenders of contracts where incumbent employers already have their own broadly comparable schemes. While the policy intention is for employees to move back to public sector schemes that may not be viable from a procurement law perspective. That is because any bulk transfer of members’ accrued rights from the incumbent’s scheme back into the public sector scheme may give rise to additional costs on the incumbent, giving other bidders an economic advantage. In many retenders therefore, it seems likely incumbents will retain the option of offering staff continued membership of their own scheme. In these cases, comparability will generally be assessed against the public sector scheme at the date of the new transfer.

Governance of public service pension schemes

TPR was given an expanded role in the Public Service Pensions Act 2013, in respect of the governance and administration of public service schemes.

From April 2015, it will set standards of practice in order to help the Local Government, NHS, Teachers, Civil Service, Armed Forces, Police, Firefighters and Judicial pension schemes to meet governance and administration requirements.

Consultation

On 10 December 2013, TPR published for consultation:

• a draft code of practice providing practical guidance to help public service pension schemes to meet governance and administration requirements set out in legislation
• a draft regulatory strategy describing how it will educate and enable public service schemes to meet the standards of practice outlined in the code; but where necessary taking enforcement action to ensure the underlying legal requirements are adhered to.

The consultation closes on 17 February 2014.

Knowledge and understanding

For example, mirroring the requirements on trustees in the private sector, the draft code requires pension 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.

Enforcement

TPR’s new role will be supported by a reporting regime mirroring the existing private sector system with the power to appoint an appropriately qualified person to a scheme’s pension board, issue improvement notices and recover unpaid contributions.

Death or ill health benefits

Death benefit and incapacity cases often involve highly personal and sensitive matters, and the decisions made can have a significant impact on the lives of those affected. It is therefore very important that the cases are handled with great care.

Ill health

A recent PO decision, in relation to the LGPS, illustrates the need for all the appropriate steps under the rules or regulations governing the scheme to be followed.

In Kelly, the Pensions Ombudsman upheld a complaint by a deferred member who was refused an ill-health early retirement pension. As well as failing to obtain the required certification from a valid independent registered medical practitioner (as required under the LGPS Administration Regulations 2008), the employer did not consider all relevant medical evidence – including a report from the member’s own specialist.

As a result, the case was remitted to the authority for reconsideration and the PO made an award for distress and inconvenience.

Checklist

When a death benefit becomes payable or a member applies for an incapacity pension it is important to ensure that the decision maker follows the correct procedures:

• the decision maker must be fully aware of the definition of dependent, or test of incapacity, under the scheme
• all relevant information should be collated and provided to the decision-maker before a decision is made
• when making a decision, the decision-maker must carefully review all of the information and only then make a decision, taking into account relevant factors and ignoring irrelevant factors.

Further information can be found in our Alert, Top tips in death benefit and incapacity cases.

Misstatement

Misstatement and overpayment of benefits are not an uncommon events, both in public sector and private sector schemes. These cases can often lead to protracted member complaints, many of which result in a complaint to the Pensions Ombudsman.

Legal test

Whilst there are a number of practical steps involved in determining a misstatement case, or recovering an overpayment, this is underpinned by certain legal principles.  These principles will inform the information that must be gathered when investigating the issues.

• The basic legal position is that members are only entitled to be paid benefits in accordance with their entitlement under legislation.
• In misstatement cases, it is necessary to consider what the member would have done if they had been provided with correct information at the time when they were in fact provided with incorrect information?
• In overpayment cases the extent to which a member has “changed his position” as a result of the overpayment must be considered.
• Ensure that an error has been made before communicating with the member.
• When there has been an error, identify the cause and determine whether this error affects a wider category of members.

For further information, please see our Alert, Top tips in misstatement and overpayment cases.

Pensions liberation

Pension liberation is providing substantial difficulties for the public sector, with authorities having to tread a difficult path between their duty to protect members from fraudulent schemes and their obligation to transfer members benefits upon request.

Authorities should think carefully about their strategy for dealing with suspected fraudulent liberation requests, and what will be in the best interests of the individual member and the scheme.

Authorities who do not have a solid strategy for tackling fraudulent transfer requests are at risk of preventing pension scheme members from actions which, while unwise and potentially highly detrimental to savings, are not illegal.

Checklist

TPR has identified a number of warning signs to assess whether pension liberation is being attempted, to ensure potential cases are discovered through appropriate due diligence.

• Check the receiving scheme – is it registered with HMRC? Has there been a sudden influx of transfers to this scheme? Does a search on the internet reveal anything unusual? In particular, an overseas scheme may be an alert to an attempt at pension liberation.
• Check on the adviser – are they reputable, are they registered with the FCA? Ensure that communications are in writing and on headed notepaper.
• Is the member seeking to transfer before age 55?
• Ask the member if cash incentives have been offered or an introduction fee? Were they approached unsolicited, such as by text?
• Authorities may wish to ask for and review the promotional material about the receiving scheme. Any literature including the words “legal loophole”, “loan” or “savings advance” etc. should be a warning sign.
• If the authority or administrators have concerns they can call TPR to see if the proposed receiving scheme is on a list held by TPR. The extent to which TPR can assist will depend upon the stage of their investigation.