To get outsourcing past the unions, Thatcher did a deal on pensions – but it is now under threat
Since the early 1980s, when the Thatcher administration started its programme of privatisations, the appetite of successive British governments for privatising and outsourcing public services at national and local level has not diminished. From John Major's compulsory competitive tendering through Tony Blair's "best value" to the current government's localism bill, the underlying doctrine has been "private good, public bad". The grand privatisations of the 80s and early 90s – electricity, gas, water and rail – have been followed by innumerable outsourcing deals. These deals range in scale from the national (for instance, running the criminal records bureau) to the local (such as waste management, street lighting and residential and domiciliary care).
What happens to the public sector staff who provide these services? The European law which ensures that their contracts of employment are transferred to the new employer does not cover pensions; the protection given by the Pensions Act 2004 is exiguous at best. And pensions are a very significant element in public sector remuneration. They have low contribution rates, index-linking of retirement benefits for life and, above all, defined benefits, meaning that the amount you get in retirement is fixed by reference to your earnings history, rather than the value of investments made by your pension fund manager. They offer (even though most have undergone some downgrading) far better value for the employee than anything available in the private sector.
So in order to avoid legal claims and buy off potential resistance from the public sector trade unions, the Thatcher governmentintroduced a policy which in 1999 came to be formalised as the "Fair Deal for staff pensions", or Fair Deal for short.
Fair Deal policy says that where public sector staff are transferred to private sector employment as a consequence of a privatisation or outsourcing, the private sector employer must (in all but exceptional cases) either offer a "broadly comparable" pension scheme or, where legally possible, buy itself into the public sector scheme. Under the Fair Deal you may be involuntarily transferred to a private sector employer, but at least your retirement remains secure.
However, the government has opened a consultation on the possible abolition of Fair Deal and is clearly intent, at a minimum, on reforming it by significantly reducing the protection it offers. The consultation has emerged at the same time as Lord Hutton's report on the future of public sector pensions, but it is important to be clear that the two documents deal with very different issues. Hutton is looking ahead, making what are widely accepted as sensible and fair proposals about the future. The consultation, on the other hand, is considering whether and how far to renege on an existing commitment to protect accrued rights.
The consultation paper sets out the government's position. The requirements of Fair Deal, it says, are technically complex because it uses different actuarial models from private sector pension schemes. Its pensions are much more expensive than private sector schemes, and especially so where the transferring workforce is small.
As a consequence they deter smaller businesses from entering the outsourcing market and impede the "plurality of provision" that the government wants to see in public services. Their high cost falls on the public purse, being passed back to the public sector through contract prices. Many public sector pension schemes have changed over the period during which outsourcing has been under way, so where workers return to public sector employment they may be entitled to better pension provision than their colleagues who have remained in the public sector.
Some of these are real issues, although the consultation overstates them in some respects. Small and medium-sized businesses have not been deterred from being the main providers of outsourced care services, but where they are, Fair Deal already allows for exceptions to be made for small workforces; of course the cost falls on the public purse, that's because the employees concerned are public servants; the potential difficulties on a reversion in-house are almost entirely theoretical because such "insourcings" almost never occur.
But that is not the point: this is a question of moral and legal obligation. Employees have chosen a job that promised an exceptional pension, balanced for the most part by modest pay and often a commitment to thankless and frankly boring work. They find themselves working in the private sector – without, in general, any choice in the matter.
The introduction to Fair Deal reads: "It is not in the interests of the [public] authority, or the new employer, or the taxpayer, for staff to be alarmed about the prospects for their pensions." If that was true in 1999, then how much truer is it in 2011, when we have seen just how unreliable ordinary asset investment can be as a basis for personal pensions?
There is no doubt that public sector pensions need reform, and the Fair Deal could do with some simplification – but what the consultation contemplates looks more like an assault on social solidarity and on the security of public sector workers than it does like a measured review of a complex policy.