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Outsourcing: the new Fair Deal
by By Malcolm Stanley, from independent pensions and benefits consultancy Hymans Robertson
Tuesday, October 29, 2013

Outsourcing firms working with the public sector should take note of the Government’s new Fair Deal. Outsourcing firms currently contract out many public sector employees from the public sector pension and provide an equivalent arrangement, but they will soon be able to offer them the option of staying within their public sector pension schemes, rather than having to place them within their own programme. They will also be able to transfer existing staff back into public sector pension schemes at the end of existing public sector contracts. This will affect more than 500,000 workers within teaching, the NHS and central government.

This reform will be welcome news to many in the outsourcing industry, who have seen requirements around pension provisions as problematic in the past. The defined benefit schemes that contractors are currently required to provide to transferred staff are costly, often carrying unwelcome complexity and financial risks that can act as quite a deterrent to those looking at tendering for contracts. Enabling access to public sector pension schemes however can remove these barriers, opening the door for new contractors to bid for work.

The effect of this could be a liberalisation of the public sector contracting market. SMEs, charities and others that may not quite have had the pensions capabilities to take on much public work in the past should now find the process easier. This could theoretically lead to lower costs and more innovation for public services. It also makes pension provision easier for both contractors and members to understand.

The new Fair Deal will also save time and effort. Contractors currently spend a considerable amount of time addressing pensions in the tendering stage of a contract, but there may possibly be an option to enter into a standard participation agreement in the relevant public sector pension scheme for new contracts.  This would standardise the process for all bidders, making life both easier and fairer.
Awarding bodies will also have one less thing to worry about as the pension costs will arguably be removed from the equation when bid prices are reviewed. Bidders’ pension management expertise will no longer be a factor, allowing the decision to be based on the quality of the service and the ability of the bidder to provide it. This is surely fairer for all involved.

There are however some questions that contractors will need answered and they should be aware of the finer details of the new Fair Deal before taking advantage of it. For example, ‘risky’ employers may be levied with an additional 2% of payroll (in respect of the transferred staff who are covered by the public sector scheme, rather than their entire workforce) to protect the public sector. Being deemed risky may have implications for a contractor’s wider business, so a balance will need to be struck on how this is decided. Contractors may also remain on the hook for additional costs relating to pension schemes at the end of their contract, for example if they default on payments during the contract term or grant excessive pay increases that feed into members’ pension amounts.

Whilst new contracts and those covered by the old Fair Deal will be subject to the new rules in the future, outsourcers with contracts sourced prior to the old Fair Deal will have questions that need answering. There is no mention of contractors in this position and clarification will be needed over whether these staff will be eligible to return to the public sector scheme on a contract renewal.
These changes are likely to really be felt across the public sector. They should inject a shot of competition into the outsourcing market, giving SMEs, charities and others a fair run at contracts where they might have previously not been in the race. New lower costs may also tempt some outsourcers to look at moving into other public services which they have dismissed as uneconomical in the past.

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