The proposed extension of Fair Deal to colleges – a double-edged sword?

It has been reported that the Treasury plans to extend the non-statutory guidance known as Fair Deal to colleges.

What is Fair Deal?

By way of reminder, ‘Fair Deal for staff pensions: staff transfer from central government’ (Fair Deal) was introduced in 1999 and has evolved in various forms. Currently, in practical terms, Fair Deal provides that when staff are compulsorily transferred out of public sector employment, the new employer should ensure that transferred staff are able to retain access to the public sector pension scheme which they were either members of, or eligible for, prior to that transfer. The ONS reclassification of colleges prompted many to consider whether Fair Deal should now apply to colleges. The Treasury appears to agree and has sought the views of the sector on this proposal. 

The academy sector has been subject to Fair Deal for some time and, with (some) parallels to colleges following reclassification, we can seek to draw comparisons in an effort to consider the impact of the widening application of Fair Deal to colleges. 

The main implication of applying Fair Deal to the practicalities of college life is likely to relate to the outsourcing of cleaning, catering, IT, or leisure functions. Most of the transferring employees within these groups are likely to be eligible for, or members of, the Local Government Pension Scheme (LGPS), at least in first generation transfers when the college first outsources the function in question. Therefore, we have focused this article on that particular scheme. That said, if Fair Deal is widened to encompass colleges, all public sector pension schemes operated by the college would potentially be in scope. 

Under Fair Deal, when a particular function is outsourced, if the staff to be transferred are currently eligible for the LGPS, or members of it, this eligibility/membership must be continued post transfer. If there is a subsequent transfer of individuals from one outsourced provider directly to another, Fair Deal would continue to apply, so as to require the contractor to continue to offer access to the LGPS to those staff who were still eligible or active members of the scheme. Any new employees who are taken on by an outsourced provider are not eligible for the LGPS.

The previous Government was eager to ensure that members of staff who had access to a high-quality public-sector pension scheme continued to retain this access, even if their employment was transferred out of their public sector employer. The indication from the current Government is that it is eager to retain and enhance employees’ rights across the board, and therefore the fact that the extension of Fair Deal to colleges is being considered at this stage, is not surprising. 

Implications of applying Fair Deal to colleges

In practice, if Fair Deal is widened to encompass colleges, a contractor who has acquired staff who are eligible to be, or are, members of a public sector pension scheme, must apply for what is known as ‘admitted body status’. The individual pension fund will consider the application and present the parties with an admission agreement. 

If Fair Deal is extended to colleges in the same manner as it has been for academies, the college is likely to be a party to that agreement. Historically, this has caused some complications for academy trusts, as the requirements of individual pension funds and the security they require from both the contractor and the academy to agree to the contractor becoming an admitted body, do not always align with the strict requirements of the Academy Trust Handbook. Although there has been a willingness on the part of the DfE to resolve some of these issues, the inconsistencies appear to derive primarily from differing approaches to admission by the various LGPS funds across the country. 

The LGPS is administered locally by 86 local pension funds in England and Wales and, unfortunately, each fund can operate in quite different ways, in particular in relation to the admission of private contractors. In particular, some funds will require enhanced guarantees and securities for those being admitted to the pension fund. To some extent, this is understandable from the pension funds’ perspective, as they need to be certain that the private contractor will do what is required while participating in the fund. This necessarily has a knock-on effect for the public sector body choosing to outsource a function: when the contractor is operating within very tight profit margins, additional pension costs can influence who could tender for the contract and ultimately how much this costs the college.  The contractor may well directly incur additional costs, which will likely be passed on in its charges to the college, but (depending on the details of the deal struck) the price may also increase in any event to reflect a contractor’s increased risks associated with becoming an admitted body. 

The DfE’s LGPS guarantee 

Within the academy sector, the DfE has extended its overarching LGPS guarantee to cover outsourcing arrangements. This guarantee states that the DfE will permit what is known as ‘pass-through arrangements’ in these circumstances. In basic terms, the practical implications are that the academy trust will retain responsibility for the pension liabilities of staff transferring to the new contractor as part of the outsourcing arrangement. An admission agreement will still be required, but often the pension fund will draft this to give the academy trust most of the liabilities and costs associated with the contractor continuing to offer access to the LGPS (which will, to some extent, mitigate against a contractor feeling it needs to increase its charges). There are notable exceptions to this – the contractor will usually be responsible for employer contributions, and some additional liabilities, such as ill health retirements, but this will be a matter of negotiation between the parties. 

In practice, the above situation has worked well. However, since the DfE guarantee was extended in June 2023, we have seen inconsistencies in different LGPS funds’ approaches to admission. Even if a pass-through agreement is proposed, some funds still require additional security from the parties, including the purchase of what can be an expensive bond, or a guarantee from the academy trust. This is in addition to the DfE guarantee. The logic applied by these pension funds in requiring additional security, is that the DfE guarantee for academies only crystallises when the academy trust itself closes. In circumstances where a contractor does not pay what is due to the pension fund, and the academy trust is unable to pay due to lack of funds, the DfE guarantee would not necessarily assist in this situation. 

In circumstances where the pension fund requires additional security from the academy trust, many trusts have struggled to align this with the strict requirement to obtain consent from the Education and Skills Funding Agency (ESFA) before entering into guarantees, as required under the provisions of the Academy Trust Handbook. The position is similar for colleges, as consent is required before any college enters into a guarantee beyond the delegated limits set down in the College Financial Handbook. The uncertainty associated with pension liabilities means that delegated limits could well be breached by a relatively small contracted-out service. 

What next?

There is a lot for both the sector and for the Government to think about when considering whether Fair Deal does, or should, extent to colleges. The position for academies and the application of Fair Deal to the admission process is far from settled, although it is in a much more stable position given the extension of the DfE guarantee. However, there is no such DfE guarantee currently in place for colleges and therefore, in circumstances where Fair Deal is extended to colleges, the option of the pass-through agreement may not be a possibility. It would seem logical that if Fair Deal is to apply to colleges then so should the DfE guarantee. Without that, there may be further difficulties to be overcome regarding the pension funds and their need to obtain sufficient guarantees where colleges outsource functions to private contractors.

There are, of course, potential beneficial impacts of extending Fair Deal to colleges. If a private training provider is competing against an incumbent college to win a contract being retendered (e.g. for certain types of funded education provision) then it may be harder for the private college to undercut the college on price. If the private contractor won the competition and took over the contract in circumstances where TUPE applies and Fair Deal has been extended to colleges, the private contractor will likely have increased pension costs, which arguably, at the moment, it does not (and which therefore potentially enables it to offer a lower price in the tender).

It is logical that extending Fair Deal to colleges is being considered given public sector reclassification. However, we would hope that the lessons learned from decades of application of Fair Deal in the academy sector will fuel a different, more efficient, and more certain approach from the outset. 

Jean Boyle 

October 2024