The wrangling over public sector pension reform is largely over, with the majority of trade unions having signed agreements with the Treasury about the changes.
However, the government only last week published important detail on two potentially volatile areas of reform: the employer cost cap and the Fair Deal policy.
Making Fair Deal fairer?
Initially, the announcement that the government would reform the Fair Deal policy was greeted with controversy. The policy states private sector employers who have former public sector workers transferred to them must provide a comparable scheme. Last year, the government asserted the policy acts as a barrier to firms tendering for public sector contracts, as only the largest contractors could pay for such high-quality schemes.
The Treasury launched a consultation on reforming the policy in March 2011, amid complaints it would strip public sector workers of their only certainty in an environment where the government is keen to contract out public services.
Despite initial fears of an abolition of the policy, chief secretary to the Treasury Danny Alexander (pictured) announced in July this year that the “overall approach” of Fair Deal would be retained, by allowing all transferring staff to remain in their public sector scheme, with their new employers contributing to it.
The Treasury said: “The government believes this option provides protection for transferred employees, while the lower costs of providing defined benefit pensions via the public service schemes will provide better value for money for the taxpayer and reduce barriers to plurality in the provision of public services.”
It also said this system will remove the need for complex bulk transfers of employees into new schemes when contracts are retendered.
In a response to the 104 submissions to the consultation, published last week, the Treasury set out in more detail how this will work.
The reformed Fair Deal will mean all staff transferred to a private employer under TUPE will retain membership of their public scheme.
Scheme-specific mechanisms such as the process for determining employer contribution rates will be decided by schemes subject to Treasury consent.
The new policy will cover the same circumstances as the old policy, meaning it will not apply to transfers from local government. However, the Treasury said the Department for Communities and Local Government will “consider the impact” of the new Fair Deal.
Private sector employers will pay contributions into the schemes at rates reflecting those previously paid by the public sector employer.
Private employers will be responsible for informing the scheme administrator when their employees are no longer eligible for Fair Deal protection, such as when they stop working on the public service contract they worked on at the point of transfer. In these cases, accrued pension rights will be deferred. Employers must provide all information required by the scheme rules about contributions, service and salary.
When employers bid for a contract involving employees already covered by the existing Fair Deal policy, they will have the option of providing a comparable scheme or contributing to the public sector scheme.
The guidance will not apply to staff transferred out of the public sector before the Fair Deal policy came into force in 1999.
Capping employer costs
Another contentious area of public sector scheme reform was the employer cost cap proposed by Lord Hutton in his 2011 report. Though the Public Service Pensions Bill provides the legislative framework for this, the Treasury did not release details on how it will work until last week.
The cap will apply to all main reformed public sector schemes. In funded schemes such as the local government schemes, the cap will operate at the scheme level rather than at the level of each individual fund.
The cap will work by placing a ceiling on the level of employer contributions needed to cover specific costs, expressed as a percentage of pensionable pay and set out in the scheme regulations.
These costs include past and future service costs of the schemes, and the costs of pre- and post-reform schemes.
The Treasury says it has designed the cap to exclude some costs of the scheme.
“As only active members will see their benefits or contributions adjusted if the ceiling or floor is breached, the government considers that it would be unfair to control all of the costs associated with pensioner and deferred members of the existing schemes,” the document says.
“These elements of costs will therefore not be controlled by the cost cap mechanism.”
There will be a two percentage point margin above and below each cap, and if at any point scheme costs breach the floor or ceiling, it will trigger a correction process.
For example, in a scheme with a cap of 14% of pay, if a valuation determines that the employer contribution rate must rise to 17%, action would be required to reduce it to 14%. Similarly, if the valuation showed that contributions must fall to 11%, action must be taken. Variations between 12% and 16% would not automatically require adjustment.
The responsible authority, scheme managers, employers and members must undertake a consultation to agree on how to correct scheme costs if they fluctuate beyond the margins.
Options to correct costs include adjusting future accrual or changing member contributions. Importantly, the Treasury said there is “no intention” to make changes to benefits already accrued via the cost cap mechanism. If no agreement can be reached within a specified period, a default action set out in scheme regulations would take place.
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