Consultations

Consultation

Consultation: Local Government Pension Scheme Regulations - Fair Deal and the LGPS

Response

August 2016

Consultation response to 'Fair Deal' and to the Local Government Pension Scheme

April 2019

For and on behalf of Tyne and Wear Pension Fund

Dear sirs

I am writing to provide the response of Tyne and Wear Pension Fund (TWPF) to the policy consultation on 'Local Government Pension Scheme: Fair Deal - Strengthening pension protection'.

Before responding to the specific questions raised, I would comment that TWPF broadly welcomes the proposals, particularly those that are seeking to strengthen certain protections.

I will now respond to each of the questions in turn:

Question 1 - Do you agree with this definition (i.e. protected transferees)?

We agree with the definition of 'protected transferee' as set out in regulation 3B(1). 

Whilst we agree with the definition found in regulation 3B(1), we have several comments in respect of other paragraphs of regulation 3B, in particular:

• Regulation 3B(5) - we have had the opportunity to see several sets of representations kindly shared by other parties before submitting our own, within these we have noted several parties suggesting the phrase "wholly or mainly"should be defined.  It could be argued that these words ought to be given their everyday meaning , however, for the avoidance of any doubt, it may be beneficial to provide a definition for the term.  Of those definitions we have seen, we would support that of the LGPS Technical Group and for "mainly" to be defined as 'spending not less than 51% of an employee's time of employment on the delivery of the service of contract tasks'.

I would also query whether the use of the term "wholly or mainly"gives rise to potential issues with some larger service providers.  For instance, under the proposed regulations, as drafted, an employee would be protected whilst working wholly or mainly on the service contract.  However, a service provider may then determine it worthwhile to spread an employee's time across 3 contracts (those contracts could even relate to outsourcings by Fair Deal employers) meaning the employee would no longer be "wholly or mainly" employed on the delivery of the service or function transferred. The result of this would be that the employee(s) in question would lose their protection. Given that significant financial savings can be made by service providers simply by moving staff to cheaper schemes, I would question whether we should be looking to make the provisions more robust.

Also, as drafted, regulation 3B(5) could result in a situation where a temporary break from a service contract results in the loss of LGPS eligibility for a member. Should that employee return to working on the outsourced service contract they would not regain LGPS eligibility.

• Regulations 3B(7) and (8) - we note the suggestion of a service provider being able to provide LGPS membership for non-transferred staff who are engaged on a transferred service or function. We would question who would monitor the protected transferee status of such members (and would resist any suggestion of this being for an administering authority).  Furthermore, if this option is something that could readily be revoked then I would question the fairness of this on the staff member.

• Regulation 3B(11) - we have noted the LGA's suggestion that regulation 3B(11) is in contradiction of regulation 3B(7).  We would agree with this suggestion and also support the insertion of the words 'subject to regulation 3B(7)' at the start of regulation 3B(11).

Question 2 - Do you agree with this definition of a Fair Deal employer?

It is noted that higher and further education corporations have been excluded from the definition of Fair Deal employer.  Whilst we acknowledge the logic behind this, it should be noted that this could have an adverse impact on the LGPS. 

Higher education and further education corporations are large employers within the Scheme. They are also facing significant financial pressures which has been well publicised.  The increasing cost pressures of the Teachers' Pension Scheme and the University Superannuation Scheme will only exacerbate the position.  In this context, it cannot be ruled out that higher and further education corporations will take steps to reduce costs wherever possible, including pensions costs. Given the increasing costs in the TPS and USS it is increasingly likely that the colleges and universities may target staff with LGPS eligibility.  Failure to protect those staff within Fair Deal could make those staff vulnerable to losing their LGPS eligibility. 

We have already seen some colleges and universities create wholly owned subsidiaries and transfer large groups of staff to those entities.  The main drive behind this has been to reduce pensions costs. Whilst it is acknowledged that such entities are likely to be Schedule 2, Part 2 bodies the staff would require designation for LGPS eligibility.  Clearly, the universities and colleges are not designating such staff.

Given the harm that could be caused to the Scheme by the exodus of members from higher and further education corporations, we would request you consider including those bodies listed in paragraph 14 of Schedule 2, Part 1 of the 2013 Regulations (as amended) within the definition of Fair Deal employer.

In relation to the definition itself, as set out in regulation 5(2), aside from our suggestion of including paragraph 14 (higher and further education bodies), we note reference to paragraph '25'.  I believe this is an error that ought to be amended to paragraph '24'.   Additionally, given reference to being "employed by a Fair Deal employer" in regulation 3B(1), I would also suggest consideration needs to be given to those members to whom Schedule 2, Part 4 applies.  As drafted, they are arguably excluded from the scope of being protected transferees.

Question 3 - Do you agree with these transitional measures?

We largely agree with the transitional measures.  One point to make is that regulation 3B(9)(a) does not include a scenario where the current service provider sub-contracts the service to another service provider.  This omission could easily be addressed in regulation 3B(9)(a) by providing for that scenario.

Question 4 - Do you agree with our proposals regarding the calculation of inward transfer values?

We have no submissions to make in respect of this question.

Question 5 - Do you agree with our proposals on deemed employer status?

We understand, and support, the principles underlying the proposals in relation to 'deemed employer' status for service providers.  Notwithstanding this, we feel the proposals are too light on detail and are potentially being introduced when there has not been sufficient consideration on this point. We are also concerned that the deemed employer status option may be an oversimplification of what is a complex area.

Our concerns on this are as follows:

1. The proposals that we are being asked to consider are very low on detail with the intention seemingly for the substantive detail to be contained in not yet drafted SAB guidance.  We are therefore being asked to comment on proposals with limited information.  It would be better for us to comment when proposals have been "beefed up".
2. Many outsourcing LGPS employers are naïve in respect of pensions matters.  Conversely, a number of service providers are sophisticated and well informed on pension risks.  As proposed, the deemed employer status, in our opinion, would leave the position open to abuse for service providers and could leave Fair Deal employers exposed to pensions risks.  Such risks could be substantial in financial terms.  Whilst appropriate safeguards could be built into the service contract, it is highly questionable that many outsourcing employers would have the depth of knowledge required to secure those safeguards.
3. It is doubtful deemed employer status for service providers would achieve one of the stated aims of reducing the administrative burden on administering authorities.  It is questionable that the service provider will want to use the payroll provider of the Fair Deal employer meaning the administering authority is going to need to liaise with the service provider.
4. Are sufficient safeguards in place to ensure appropriate provision of data to administering authorities?  Regulation 3B(14) is noted and this would require provision of data to the Fair Deal employer who would then be required to relay this to the administering authority.  However, this is unlikely to be an efficient system and could result in delays in administering authorities receiving data.  This would not be a good outcome.
5. Paragraph 40 of the consultation document states: 'as the legal employer, they will be responsible for deducting employee contributions and providing information to the pension fund (for example, for end of year processing)'.  There is nothing in the draft regulations in relation to this, rather the regulations envisage such measures being facilitated through the Fair Deal employer.  Consideration needs to be given as to how this is likely to operate in practice.  If administering authorities are to directly liaise with deemed employers then appropriate safeguards need to be built into the regulations.
6. The deemed employer status option may result in additional work and costs for administering authorities in the following ways:
   • (i) assuming a scenario where an outsourcing Fair Deal employer has received appropriate advice and has appropriate protection in the service contract, there is likely to be some cost review mechanism in the contract.  Such review being likely to take place at the triennial valuation.  This would make the triennial valuation exercise for that Fair Deal employer more complex resulting in additional time commitment being needed for the administering authority and increasing costs (for example, by way of additional actuarial fees);
   • (ii) an administering authority and its actuary are going to want to identify those working for a deemed employer in order to assist with administration. This negates one of the advantages of the deemed employer option and may make the administrative system more complex (i.e. having a Fair Deal employer with a number of connected deemed employers may be a more messy and complex system than having separate scheme employers).
7. Decision making process - it is not clear how the role of the deemed employer (being the legal employer) would interact with the Fair Deal employer potentially being responsible for the exercise of discretions.  Clarity is needed as to who will have decision making responsibility.
8. Admission Agreements contain a number of important protections that are not necessarily covered in the regulations.  Has sufficient consideration been given to ensuring appropriate protections are in place for administering authorities and Fair Deal employers by the suggested use of the deemed employer status for service providers?
9. The use of guidance for academies is noted in regulation 3B(4).  Who is to prepare this guidance, is this to come through DfE or MHCLG?  We would certainly encourage the involvement of MHCLG if this guidance is to come from DfE. Also, who would be responsible for ensuring compliance with this guidance?
10. The proposed amendments to the regulations are low on content in respect of deemed employer status for service providers.  Has a full review of the regulations been undertaken to ensure there are no potential contradictions / complexities?

Despite the above concerns, we are not wholly opposed to the deemed employer status option for service providers.  However, we remain concerned that this is being hurried and may be an oversimplification of what is a complex area (i.e. risk sharing / pass through).  We would request that this matter be parked temporarily to allow other areas of the consultation to proceed.  The matter could then be looked at again with a view to identifying the risks more fully and allowing appropriate safeguards to be put in place. 

Question 6 - What should advice from the scheme advisory board contain to ensure that deemed employer status works effectively?

As stated above, we have concerns about the deemed employer status for service providers at this stage.  The draft regulations have taken a very 'light touch' approach meaning the detail is going to need to come from the SAB guidance.

Given the proposed importance of the SAB guidance (i.e. being the document that contains the detail), consideration needs to be given to its status. For instance, is it to be binding guidance, or perhaps statutory guidance (if introduced by SoS rather than SAB).  Alternatively, is there simply an intention for it to be a guide to the relevant parties and therefore not binding.  We would request it is not the latter status.

Consideration needs to be given as to whether a standardised approach to risk sharing is to be taken or whether the parties are free to negotiate, with the administering authority having some element of discretion in agreeing risk sharing provisions.  We prefer the latter of these options and each administering authority could set out its position in its Funding Strategy Statement.

In addition to the above, the SAB guidance should contain information on the following:

• when it is appropriate to consider deemed employer status - the pros and cons of this option and the admitted body status option.  What types of case may be suited to each of the options;
• what are the risk sharing options;
• other alternatives, such as being pooled (or grouped) with the outsourcing Fair Deal employer;
• the responsibilities / obligations of the parties;
• clearly identifying all of the risks for outsourcing employers;
• what safeguards should be built into the service contract - for example, provisions relating to pay increases, redundancy costs etc.  Comprehensive consideration on this point will be needed; and
• it may be appropriate for the SAB guidance to contain draft clauses for use in the service contract.

Given the potential importance of the SAB guidance, we would request there is a meaningful consultation process prior to its introduction.

Once again, given the complexity of this matter, we would request the introduction of deemed employer status for service providers be delayed to allow further consideration by stakeholders.

Question 7 - Should the LGPS Regulations 2013 specify other costs and responsibilities for the service provider where deemed employer status is used?

As stated above, paragraph 40 of the policy consultation document provides that the service provider "will be responsible for deducting employee contributions and providing information to the pension fund". However, there is nothing in the draft regulations to require this.  In fact, under the draft regulations, responsibility for such matters will vest in the Fair Deal employer.  It would be prudent for this to be clarified in either the regulations or guidance.

Another area requiring further consideration is regulation 60 of the LGPS Regulations 2013 and how this will be impacted by the deemed employer status of service providers.  Consideration should be given to whether changes are needed to the regulations or whether this would be best resolved through the guidance.

Question 8 - is this the right approach (i.e. the retention of the admission body option and allowing for risk sharing provision in the admission agreement)?

We fully support the retention of the admission body option and believe this is entirely appropriate.  Given the reasons set out above, and in the absence of information in SAB guidance at this time, the admission body route appears preferable.

In relation to admission agreements containing a provision to allow risk sharing provisions, we believe it would be better for such provisions to be contained in the service contract, as far as is possible and reasonable. Nonetheless, the proposed regulation simply makes it permissive for admission agreements to contain risk sharing provisions which is an appropriate step. Each case can then be considered on its own merits and a decision taken as to whether to include risk sharing provisions or not in the admission agreement. It would be appropriate for administering authorities to have a written policy statement on this or, alternatively, some detail could be provided in the FSS.

Question 9 - What further steps can be taken to encourage pensions issues to be given full and timely consideration by Fair Deal employers when services or function are outsourced?

Most, if not all, administering authorities will share a frustration that pensions matters are generally an afterthought during an outsourcing. 

One way to help improve this may be for a requirement to be imposed in the regulations for an outsourcing Fair Deal employer to notify the administering authority of the outsourcing at a defined time.  This would promote early consideration and discussion with the administering authority on pensions matters. This early engagement would hopefully minimise the risks of problems further down the line.

Notwithstanding the above, any duty without 'teeth' may well be overlooked or ignored.  The obvious way to make the requirement more rigorous would be to allow an administering authority to fine an outsourcing employer for failing to deal with pensions matters appropriately.  It is fully accepted that the ability to issue such a fine would be a fairly draconian step and we are not necessarily lobbying for this.  This is simply being stated as an answer to what may help promote the earlier and more detailed consideration of pension issues in an outsourcing.

Question 10 - Are you aware of any other equalities impacts or of any particular groups with protected characteristics who would be disadvantaged by our Fair Deal proposals?

No.

Question 11 - Is this the right approach (i.e. transferring pension assets and liabilities)?

We see this as 2 separate issues, namely:

1. A successor entity, following takeover or merger, being automatically admitted to the Scheme and being responsible for the pension liabilities of the outgoing entity; and
2. The automatic transfer of assets and liabilities from one fund to another fund when the successor entity already participates in another fund.

In respect of (1), we support this.  The proposals provide appropriate protection for administering authorities and also assist entities who, for commercial reasons, are looking to takeover or merge with another entity.

We do not however support what is being proposed under (2).  We consider this to be both excessive and unnecessary.  Our reasons for opposing this are as follows:

• There is little harm in the successor entity remaining within the same fund as the outgoing entity (aside from the administrative burden of dealing with more than one LGPS sub-fund for the successor entity, but many employers are in this position already);
• What is proposed is inconsistent with other provisions in the 2013 Regulations (see Schedule 3, Part 2 which results in other entities, such as MATs, participating in more than one LGPS sub-fund);
• The existing administering authority is likely to be local to the place of work for the staff / members;
• Affected members often find it distressing when their pension benefits are to be transferred to another administering authority.  This may particularly be the case where there is no local connection for the members;
• It does not allow for any consideration of the position by the respective administering authorities.  Surely it would be prudent for administering authorities to be able to assess the funding position of the successor entity.  For instance, what if the employer is in a weak position in 2 funds and, following merger, this results in a large deficit.  This is unlikely to be a position that is welcomed by an administering authority;
• The successor entity itself may not welcome such a blanket approach.  All cases are different and require individual assessment.  A 'one size fits all' approach should be avoided;
• It is unclear whether the transfer of assets and liabilities relates to active members only or all classes of membership;
• Bulk transfers are time consuming and involve additional costs (i.e. actuary fees).

If this proposal is to proceed, although we would certainly question the wisdom of (2), then it would be appropriate to allow the reassessment of the employer contribution rate following merger / takeover.  This would need to be secured by amendment regulation.

Finally, on a matter as important as the transfer of assets and liabilities, it would be preferable for provisions to be made through the regulations rather than SoS guidance.

Question 12 - Do the draft regulations effectively achieve our aims?

We believe proposed regulation 64(11)(b) should be amended to make clear that this is effective from the date of takeover / merger.

Whilst we maintain our opposition to proposed regulation 64(12), if this is to progress, consideration needs to be given to this being compatible with paragraph 3 of Part 2 of Schedule 3 of the 2013 Regulations.  

Question 13 - What should guidance issued by the Secretary of State state regarding the terms of asset and liability transfers?

As stated above, we oppose the automatic transfer of assets from one fund to another following a takeover or merger.  Nevertheless, should this proposal proceed, our view is that guidance should provide details on the methodology for assessing the value of the assets and liabilities.  In particular:

• How the initial value of assets is to be calculated.  For instance, should this be the position as at the last valuation or use a more recent unitised figure (if available);
• How is the initial value then adjusted from the previous valuation, including allowance for expenses;
• Should there be a time limit for payment;
• How are advisory costs to be met - it would be preferable for costs to fall on the employer rather than the administering authorities.

We hope this is of assistance in considering all of the above proposals.

Kind regards

Paul McCann

Principal Solicitor - Pension Fund Team

Legal Services

South Tyneside Council