Local Government Pensions Scheme in England and Wales - Scheme Improvements (Access and Protections)

91. Currently, admission body agreements include details of the responsibilities and requirements for service providers. However, as it is proposed that admission body agreements for local government outsourcings would be removed, it is important that there is clarity around the responsibilities for relevant contractors moving forward. Whilst the Fair Deal employer would remain as the deemed employer for protected transferees for pension purposes, the relevant contractor would still be their legal employer and so in practice have a range of pension-related responsibilities. 

92. The government’s proposal for how those responsibilities would be split between Fair Deal employer and relevant contractor are seen in full in the draft Regulations and in summary in the table below. 

93. In summary, the main responsibilities of the relevant contractor would be to give protected transferees access to the LGPS and to pay regular contributions for the duration of the contract. The relevant contractor would need to pay the full primary contribution rate, of the Fair deal employer, for all protected transferees. This is the rate determined by the Scheme Actuary in accordance with regulation 62(5), including the cost of administration and before any reductions for insured death or ill-health benefits selected by an employer. The Fair Deal employer would need to pay the secondary contribution rate, which would include any deficits or surpluses that might accrue over time. 

94. It would be for the relevant contractor and Fair Deal employer to decide if the primary contribution rate would be fixed (set at the rate of the most recent valuation at time of contract agreement) or floating (based on an agreement between relevant contractor and Fair Deal employer). If the fixed option were to be taken, then the Fair Deal employer would be taking on the risk that if the contract duration runs into a new valuation period and in that period contribution rates were to be increased, they would be liable for any increased payments (unless otherwise agreed with the relevant contractor). Alternatively, if contribution rates were to be decreased, the relevant contractor would be overpaying contributions, which would be reflected in the original contract price, and so the administering authority, Fair Deal employer and relevant contractor would need to agree at contract stage the mechanism by which those overpayments would be addressed.  

95. Additionally, that decision of a fixed or floating contribution would need to be decided before the contract is put out to tender, to allow all involved parties to understand their obligations before bids are made and judged. 

96. The expectation of the above arrangements is that they would lead to lower contribution rates for relevant contractors. This would be because the rates applied to them would be based on the rates of the Fair Deal employer, which would be expected to be lower due to their typically stronger covenant.  

97. The relevant contractor would also be liable for any costs arising from pension-related decisions they take, including but not limited to: 

1. A active member being awarded early retirement or early flexible retirement. 

2. A member over the age of 55 being offered redundancy. 

3. A decision to waive any reduction in pension benefits. 

4. Any award of additional pension, or employer contributions to shared cost additional pension contributions or shared cost additional voluntary contributions. 

5. A decision to ‘switch on’ the 85-year rule when the member retires from active status (if the member is under 60). 

98. Whether the primary contribution rate is fixed or floating, the deemed employer approach would reduce the level of risk for service providers (relevant contractors), which should enable more contractors (particularly SMEs) to enter the market for local government contracts. It would also mean that contractors would be likely to build in less of a risk premium into their contract price because they have more certainty about their pension costs and liabilities. 

99. The draft regulations also set out the consequences for late payment of member and employer contributions by a relevant contractor. It is proposed that if a contribution payment is overdue by a month, the administering authority can require the Fair Deal employer to pay it and the Fair Deal employer would then be able to recover it as a debt from the relevant contractor, including any applicable interest.  

100. Furthermore, relevant contractors would have a responsibility to provide their administering authority and/or Fair Deal employer with all necessary data relevant to comply with their pension-related obligations. 

101. The general principle that would apply to all agreements is that the roles and responsibilities of the relevant contractor should be made clear in the service contract. The government plans to work with stakeholders to develop statutory guidance that clarifies what should be included as standard. Additionally, the Government is also considering commissioning the Scheme Advisory Board to produce supportive guidance in this area. Further detail of this is given in “Implementation of New Fair Deal proposals”.