PFI and pensions - bringing it all back home

Written by Trowers & Hamlins LLP partner Martin McFall

One of the attention grabbing announcements at the Labour party conference in September was a proposal to look to "take control" of PFI contracts and review all these arrangements and, if necessary, take them back "in-house" under state control.

A flurry of political and economic commentators' views were espoused on the merits or otherwise of this proposal. I do not propose to examine the politics of the policy intention, but as a pensions lawyer who advised on a number of high profile PFI deals, two particular commentators' views resonated with me.

Allyson Pollack of the Institute of Health said "the first step is to open up the contracts" and Phil Lobb from Deloitte stated, "they are complex transactions to begin with and complex to exit … so the challenge is to work out whether the cost of exiting exceeds the cost of staying in". With those two thoughts in mind, part of the challenge of bringing back PFI contracts "in-house" would be addressing complex pension cost and risk exposure terms embedded within those contracts.

There are many potential issues that arise but one in particular springs to mind. It relates to historic NHS PFI contracts where staff were transferred out of the public sector and provided with membership of a "broadly comparable" scheme in accordance with HM Treasury guidance A Fair Deal for Staff Pensions (Fair Deal) applicable at that time.

In respect of transfers to broadly comparable schemes taking place before April 2011, comparable schemes would have provided RPI increases to pensions in payment. This is consistent with the provision applying to the NHS scheme at that time. Following that period, the NHS scheme has linked pension increases to the CPI measure of inflation. Accordingly, if those PFI contracts were to revert to state provision and staff elect to transfer their benefits into the NHS scheme, one would expect, subject to any particular contractual stipulation in the bulk transfer terms, that transferring staff would receive better benefits than if they had remained in the NHS scheme throughout that outsourced period.

Indeed, this would accord with the revised Fair Deal policy introduced in October 2013, which requires service credits to be on a day for day basis or actuarial equivalent where there are benefit differences between the two schemes.

At least that is what you would think. However, the author understands that the current Department of Health (D of H) policy is for it to instruct the Government Actuary Department (GAD) to offer service credits under the NHS scheme for returning transferring staff limited to those which would have resulted from continued NHS scheme membership. Broadly, the effect of this policy position for staff would be a detrimental one, in that they would be switched from accruing benefits on an RPI to a CPI basis without recognition through service credits or recourse to compensation.

How this policy works though would depend upon the wording of the bulk transfer terms, and acceptable terms being agreed, but it could hardly be described as a 'fair deal' for staff if they are, through no fault of their own, faced with the choice of transferring their past service benefits and receive less valuable increases, or retain them in the broadly comparable scheme and sever salary linkage. The commercial rationale is clear, such an approach could open up potentially significant savings to the public purse.

As both Allyson Pollack and Phil Lobb recognise the devil is in the contractual detail. Nevertheless, a future Labour government would have to tread a fine line between continuing the current D of H policy and avoiding the additional exposure to public finances or honouring new Fair Deal policy guidance and being seen to protect the interests of the many and not the few. Such a significant policy proposal from Labour may warrant future legislative change or further revision to Fair Deal to address these issues.

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