New Fair Deal for the LGPS: worth the wait?

More than 12 years after ‘New Fair Deal’ was introduced for central Government employers, and over six years since the last LGPS policy consultation, we have a new consultation - Scheme improvements (access and protections). 

It includes proposals to implement New Fair Deal within the LGPS, alongside draft regulations and an updated Best Value Staff Transfers (Pensions) Direction.

Consultation overview

Key proposals

• Introduction of Protected Transferee (PT) status for members who are TUPE transferred to a Relevant Contractor (RC) on a first or subsequent outsourcing. 
• A new term - Fair Deal Employer (FDE), covering all scheduled and designating bodies (i.e. Schedule one and two employers) apart from Higher Education. The FDE is the deemed scheme employer in respect of PTs regardless of who the RC is and how many times the contract changes hands.
• The RC contribution rate will be either fixed as the FDE’s primary rate at the start of the contract or the primary rate in each year of the contract. FDEs will need to pay any difference between the fixed and primary rate plus the secondary rate.
• New staff employed on a contract can be designated as PTs (if agreed by FDE and RC), as long as they are working “wholly or mainly” on services for the FDE.
• Transition arrangements will allow for contracts starting or renewing within six months of the regulations coming into force to use admission agreements. They also cover staff who are currently or would be protected by the various Pension Directions across England and Wales.

Benefits of these proposals

• Protect members by avoiding uncertainty and potential breaks in service: The proposals ensure scheme membership is protected regardless of how many times members change employer.
  Remove the need for admission agreements: often forgotten in contractual negotiations, these take up time and resource at Administering Authorities (AAs) and can remain unsigned, in some cases even after the contracts has ended. 
  Reduce the number of exit payments and credits as more contracts move on to the proposed basis.
  Provide a greater degree of certainty (less volatility) in the contribution rates to be paid by contractors. 
  Reduce the number of employers over time, noting many new employers are small admission bodies with short-term contracts which generate disproportionate levels of work for AAs and their advisers. 

Issues with these proposals

• Increase complexity for AAs which will need to manage relationships with and collect data from both the FDE and RC. If not handled well, these could be more complex than the existing admission body relationship. 
• Require significant changes in the processes used by AAs to implement and manage the split of employer contribution rates.
• Introduce complex transition arrangements for existing contractors and employees in broadly comparable schemes.

Getting into the weeds of the proposals would take much more space than this blog allows, so we focus below on looking in more depth at the relationship between the AA, the FDE and the RC. 

AAs, FDEs and RCs: is three a crowd?

For AAs, the biggest change is the replacement of the tripartite admission agreement with the new deemed employer approach. A key concern expressed at a meeting with MHCLG back in February was ensuring the relationship between the AA, the RC (as the legal employer of the member), and the FDE (as the “deemed” scheme employer of the member) will work. The consultation includes proposals on who is responsible for what, but as ever the devil will be in the detail. Three areas which will need careful planning for are:

Data collection 

In many ways, data collection does not change, the RC as the PT’s actual employer will be responsible for collecting and passing on employee contributions, service records, and data changes to the AA. However, the relationship will be different as the RC will not be a scheme employer. 

AAs will need to ensure their systems can identify the FDE of the PT as well as receiving data from and tracking changes to the RC as contracts move on. GDPR requirements will also need careful management recognising the different status of the FDE and RC.

There will be challenges for AAs not only in implementing the necessary processes but also ensuring that RCs and FDEs are fully aware of their respective responsibilities.

Employer contributions

The proposals seek to provide greater certainty for RCs while providing some flexibility for the contracting parties. RCs should benefit from knowing their rate will be capped at the FDE’s primary rate each year, (or ‘fixed’ at the FDE’s primary rate at contract commencement), and that no exit payment is due when the contract ends.

However, these benefits for the RC present some issues for the AA in that:

• The FDE will be required to meet any shortfall between the rate paid by the RC and the total contribution rate (primary plus secondary) certified for the year.
• Alternatively, the AA will be required to pay back to the FDE any overpayment resulting from the rate paid by the RC being higher than the total rate certified for the FDE for year.
• It’s not clear that the draft regulations cater for a fixed RC rate, subsequently falling below the FDE primary rate at the same time as a monetary secondary contribution being payable by the FDE.

Careful consideration will need to be given to the revised communication, collection, payment, and accounting process needed to implement this effectively. This is especially important for FDEs as they will be liable for any late payments from RCs.

There is some logic in this approach, especially for large long-term contracts, however a requirement for the AA to pay back contributions to the FDE (which were actually paid by the RC) seems unnecessarily complex given most contracts are small and short-term in nature. Would it not be better to leave any ‘excess’ contributions in the fund to benefit the funding position of the FDE which is, after all, on the hook for any deficit?

Employer decisions and payments

There are proposals for the RC to be liable for costs due to its decisions as an employer, e.g. the RC is liable for the strain cost of waiving an actuarial reduction to benefits, or a decision to award extra pension. 

There is a raft of detail, but issues will remain for both RCs and FDEs in understanding what they are liable for, and for AAs in ensuring the right party makes the decision, is prepared to defend them in an IDRP, and meets their payment obligations. A couple of examples where this may be a challenge are:

• RCs will still be liable for ill health strain costs. This is something contractors have raised before as they deem it out of their control and potentially significant especially for smaller contractors.
• FDEs will be liable for unpaid RC payments which may introduce some form of ‘moral hazard’ to proceedings, unless contracts between the parties enable the FDE to effectively recover those amounts. 

Actuarial considerations

The proposals follow the direction of travel for many funds; it is increasingly common for new contractors to join on a pass-through basis where the letting authority retains most of the pensions risk. Funds may welcome a statutory backing to this approach and the cost savings associated with fewer actuarial calculations (including no exit valuations). Future triennial valuations should also be more efficient if there are fewer employer contribution rates needed. However:

• Engagement with the Fund Actuary will be needed to ensure any new RCs are treated appropriately for funding and accounting purposes.
• Where the PTs are transferring from an employer which is not the FDE – for example, an academy trust outsourcing a cleaning contract when staff are transferring from the local authority - the actuary may need to advise on notional re-allocation of assets from the ceding employer to the FDE, and on whether the contribution rates for the FDE and ceding employer remain appropriate.
• The treatment of ill-health costs could be a sticking point. Many funds are currently implementing self-insurance or pooling, where risks are shared over a wider group of employers (as a better, more cost-effective solution than external insurance). The proposal for ill-health costs to be met by the RC isn’t compatible with such arrangements. The RC will be at risk of costly lump sum payments (which self-insurance aims to avoid) and where the FDE participates in self-insurance/pooling, appropriate tracking will be needed to ensure ill-health costs of the RC are not inadvertently met by other participating employers.
• The timing of new proposals is far from ideal given Funding Strategy Statements (FSSs), are being updated as part of the 2025 valuations and must be in place by 31 March 2026. Unless the final regulations are available in early 2026, the FSS is likely to need to be reviewed again shortly after it’s been finalised, to consider the New Fair Deal requirements. 

A welcome step forward, but challenges remain

This consultation has been a long time coming, so was it worth the wait? 

There are lots of positives - protecting members from uncertainty, encouraging more providers to enter the market and trying to reduce the pensions risk premium applied to contract prices. The inclusion of colleges (now classified as public sector) appears logical, as does the proposal to permit new staff to be eligible, although, we doubt that flexibility will be used any more than open admission agreements have been used.

In summary then it’s a qualified yes from us. Overall, we are supportive of the proposals and the benefits to members, employers and administrators. However, real issues remain for AAs in terms of implementation.

We would be very happy assist in preparing information for your committees, employers and members and support you in managing the shift in processes needed. Please contact us to discuss how we can help you.