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An introduction to the new Fair Deal

Published by Paul Hamilton on

The new Fair Deal guidance, effective from October 2013, removed substantial barriers that previously prevented many firms from competing for public sector contracts. 

It has also created opportunities for current contractors with 'broadly comparable' schemes to improve their position.  The key considerations vary depending on your circumstances.  The list below identifies a number of specific circumstances, so that you can select the one most relevant to you:

Newcomers to public sector outsourcing

One of the primary intentions behind the new Fair Deal guidance was to open up this market to competition from new players who either lacked the resources to establish broadly comparable schemes, or found the costs and risks previously associated with these to be untenable.  The changes should be successful in this respect, but there is one very important point to look out for.

“The new contractor will be liable for any shortfall between the transfer amount that the outgoing contractor is required to pay and the cost of reinstating employees in the public service scheme.”

For an existing contract up for re-tender, employees currently in a 'broadly comparable' scheme will need to transfer back to the public service scheme.  The new contractor will be liable for any shortfall between the transfer amount that the outgoing contractor is required to pay and the cost of reinstating employees in the public service scheme.  If, however, such a shortfall is identified by the new contractor at the bidding stage and incorporated into the contract price, then the contracting authority must take responsibility for the shortfall, whatever the amount may turn out to be.

Bidders for a contract where the incumbent provider operates a broadly comparable scheme

The key point for bidders on a contract where the incumbent provider operates a broadly comparable scheme is to identify any shortfall in the current provider’s transfer value requirement and incorporate this into the contract price.

For an existing contract up for re-tender, employees currently in a 'broadly comparable' scheme will need to transfer back to the public service scheme.  The new contractor will be liable for any shortfall between the transfer amount that the outgoing contractor is required to pay and the cost of reinstating employees in the public service scheme.

If, however, such a shortfall is identified by the new contractor at the bidding stage and incorporated into the contract price, then the contracting authority must take responsibility for the shortfall, whatever the amount may turn out to be.

Given that the general principle is for any shortfall to be made good by the contracting authority, it is disappointing that all bidders are required to make their own assessment of the shortfall to include in their contract bid.  It would far more efficient to simply exclude the possibility of any shortfall from all bids.  However, we are not aware of any plans to make such changes to the guidance.

Incumbent providers operating a broadly comparable scheme relating to an ongoing contract

If you operate a broadly comparable scheme in relation to a contract that still has some time to run, it is worth investigating whether current employees can be transferred back to the public sector scheme now, rather than at the end of the contract.

“We can assist contractors in the actuarial aspects of such negotiations, as well as identifying any other strategic opportunities in relation to ongoing pension arrangements.”

This reduces the risks faced over the rest of the contract and could also reduce the number of people that remain in the scheme at the end of the contract (i.e. the sooner you transfer staff back to the public sector pension scheme the less time there is for members to become deferred or retire and therefore have to remain in the company’s scheme).

It is often the case that details within a contract are unclear about the deficit payment due at the end of the contract.  It may therefore be possible to negotiate a favourable figure and the earlier this can be done the better.  We can assist contractors in the actuarial aspects of such negotiations, as well as identifying any other strategic opportunities in relation to ongoing pension arrangements.

Also, in relation to deferred and pensioner members who remain in the scheme, we can help contractors to review the investment strategy and consider a range of liability management exercises and de-risking strategies.

Incumbent providers operating a broadly comparable scheme with imminent contract renewal or retender

If your contract is renewed (regardless of whether a tender process has been followed) there is no requirement for employees currently in a 'broadly comparable' scheme to transfer back to the public service scheme.  However, for the reasons discussed in relation to ongoing contracts (here), there are potential advantages to transferring them back at this point, rather than waiting until the contract ends.

Assuming there is a tender process, you will need to calculate the transfer amount that the existing contract requires you to make available for onward transfer.  This information will be circulated to all bidders.  If you do indeed wish to transfer employees back to their public service scheme then, just as for other bidders, it is critical that you identify any shortfall in the transfer value (versus the cost of reinstatement in the public service scheme) and incorporate this into the contract price.  The contracting authority must then take responsibility for the shortfall, whatever the amount may turn out to be.

Given that the general principle is for any shortfall to be made good by the contracting authority, it is disappointing that all bidders are required to make their own assessment of the shortfall to include in their contract bid.  It would far more efficient to simply exclude the possibility of any shortfall from all bids.  However, we are not aware of any plans to make such changes to the guidance. 

Newcomers to public sector outsourcing
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About the author

  • Paul Hamilton

    Paul is Scheme Actuary to a number of pension schemes, and advises a range of UK businesses and trustee bodies on DB Pension issues including scheme funding, benefit design, and risk management.

    View Biography

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