The Shipbuilding Industries Pension Scheme has given certain members of its Fleet Support section the choice to rejoin a public service pension scheme as part of the government’s 'new fair deal' policy, but experts say it might not all be plain sailing.
The fair deal for pensions, which has been around for many years, ensured a minimum level of pension protection for people transferring from central government to private sector employers. An employee had to either be kept in the public sector scheme, or put in a scheme that was broadly comparable in terms of benefits.
It isn’t necessarily clear who is responsible for any funding shortfall
Nick Stones, Pinsent Masons
David Cole, chairman of the trustee, said that members in the Fleet Support section of the £1.8bn Shipbuilding scheme were offered the option of leaving the scheme and joining the civil service pension arrangement from July 1 2016.
This was due to the new fair deal policy update in October 2013. The change meant that individuals leaving the public sector and transferring to another contractor are entitled to remain in their existing public service pension fund rather than switching to an equivalent scheme with their new employer.
When contracts are retendered, employees covered by the previous fair deal policy can return to the section of the public service pension scheme that they would have been in had they remained in the public sector and not been transferred out.
This change in the law meant members of the Shipbuilding scheme’s Fleet Support section whose role is aligned to the Maritime Services Delivery Framework contract can rejoin the civil service scheme.
The scheme noted that a full communications programme with the individuals involved was carried out.
A spokesperson said that the new fair deal applied to around 370 pension scheme members, and around 70 had decided to move.
Equivalent benefits
Rosalind Connor, partner at law firm Arc Pensions Law, said that prior to the 2013 changes, “there was a whole industry” in providing equivalent schemes, partly because many public sector schemes would not allow outsourced employers to join them.
These equivalent schemes had to be certified as "good enough" by the Government Actuary’s Department, explained Connor.
However, when GAD certification stopped in 2013, public sector schemes had to allow the outsourced employers in. And where contracts involving employees covered by the fair deal policy are retendered, employers should offer staff access to the appropriate public sector scheme.
Connor said from an employee’s point of view, there may be a "feeling of certainty” in joining a public sector scheme.
“However, if they are in the public sector scheme and future benefits are reduced, as they were a few years ago in the move to [career average revalued earnings], the member's benefits accrue at the lower rate, but might stay at the higher rate in the GAD-certificated scheme,” she noted.
Reducing risk for the employer
Nick Stones, partner at law firm Pinsent Masons, said that the new fair deal is “potentially beneficial” for members because they get to transfer into the public sector pension scheme and take their past service with them.
“They may feel more comfortable with the exchequer being responsible for the payment of their pension going forward rather than a private sector employer,” he said.
It can also be good for the private sector employer, “because they have the ability to transfer past service liabilities and shift risk back to the government”.
Funding foibles
However, the downside is that “it isn’t necessarily clear who is responsible for any funding shortfall”, said Stones.
For example, he said that when pensions service credit is transferred back to the public sector scheme, the amount of money that goes with it may not, in the eyes of the public sector scheme, be enough to actually provide the full credit.
“The public sector scheme is still under an obligation to provide the full credit, but there’s a funding shortfall, so the question is, who provides that shortfall funding? Is it the employer, or is it the government department that’s got responsibility of the contract?” Stones said, adding that this usually gets decided on a case-by-case basis.
Fuat Sami, partner at law firm Sackers, said that an employer joining the civil service pension fund, for example, has to enter a participation agreement that sets out the terms on which the employer takes part.
He said that the key thing for private sector employers to look out for is “that there’s a good degree of protection in that participation agreement”, and making sure any “risks are mitigated in an appropriate way”.
