Pension Transfer for Local Government Pension Schemes

Aug 11, 2021 editor

Red Box often work with Public Sector Clients who are quite rightly informed by their Local Government Pension Scheme provider, that they need to consider the cost implications and stability of affected service staff pensions. Here is a summary explanation of the process and costs attached when tendering is the best option.

Public Sector Clients are able to decide to outsource a service to a private sector organisation where it is viewed that better value will be achieved both in terms of cost effectiveness and service quality. Where a decision is made to outsource a service to a private sector organisation, Clients are making this decision through the powers delegated to them under the Local Management Provisions.

Public bodies that let out a contract have a statutory obligation under the Best Value Authorities Staff Transfers (Pensions) Direction 2007 (referred to generally as the ‘Fair Deal Guidance’) to ensure that the contract with the new contractor secures pension protection for the transferring employees.

It is vital that the pensions issue is seen as an integral part of the outsourcing process. Once a decision has been made to outsource a service, the Public Sector Client should contact the Local Government Pension Fund with details of the outsourcing and the main contacts involved. This cycle is repeated with each tender process.

The link above is a full guide on how to manage the transfer of Local Government Pensions following award of contract.

Some key points are made below.

The first stage is for the Contractor to apply for Admitted body status, which allows them to continue the pension rights of the transferring employees. There is a cost attached to this application which is usually built into the annual profit and loss account, or depreciated across the contract term.

Admitted body status (ABS) provisions were introduced in the LGPS in 1999 to allow contractors, who take on local authority services or functions with any specific groups of transferring employees, to offer transferring staff continued eligibility for the LGPS during the contract. ABS provisions enable members of the LGPS to remain in that arrangement and continue to accumulate benefits under their existing local government pension scheme arrangements whilst their employment is transferred between different contractors and as long as they remain employed in connection with the delivery of the outsourced service.

It is vitally important for local authority officers who have responsibility for best value procurement or other potential forms of outsourcing, to discuss pension implications for outsourcing staff with the relevant LGPS administering authority, and keep the officer in their own authority responsible for pension liaison matters fully informed. This should be done at the earliest possible opportunity and before the procurement process begins, and especially when first drawing up a tender specification. This is true regardless of what pension arrangements are eventually to be offered by the contracting employer. Failure to consult with the relevant administering authority early on in the process could lead to delays or complications later on.

It needs to be recognised that it is the contractor who chooses whether they offer their employees membership of the LGPS or a pension scheme that can be certified as a broadly comparable pension scheme, when tendering for a local authority contract as part of an outsourcing exercise. Letting authorities should make it clear that pension rights going forward need to be secured prior to the contract being let but they should not stipulate ABS as a requirement of the tendering process. Contractors should inform the letting authorities of the pension provision it proposes in any tender bid.

The contractor will be required to fund, over the course of the contract, the benefits accruing during the period of that contract for those LGPS members who are covered by the admission agreement. Pension liabilities accruing during the period of the contract should be fully paid for by the end of the contract.

A contractor who has entered into an admission agreement is referred to in the LGPS Regulations as a transferee admission body, and the transferred employees and any new employees specified in the admission agreement as being eligible for membership of the LGPS are treated as if they were employed by a scheme employer, but their participation is contractual not statutory.

Additional costs to consider are bond or indemnity requests.

When a bond or indemnity may be required An admission agreement with a transferee admission body requires the letting authority to carry out an assessment, which takes account of actuarial advice, concerning the level of risk arising on the premature termination of the provision of the service or should the transferee admission body’s assets by reason of insolvency, winding up or liquidation of the transferee admission body. This risk assessment needs to be carried out to the satisfaction of the administering authority.

Where a risk is identified by any of these assessments, the admission agreement can provide, where the level of risk is such as to require it, that the transferee admission body shall provide an indemnity or bond to meet that level of risk. The LGPS regulations set out with whom the indemnity or bond must be made and includes details of bodies that may accept deposits, rather than simply those permitted to effect and carry out contracts of general insurance.

The requirement to provide an indemnity or bond seeks to ensure that local council tax payers do not have to underpin a contractor’s pension liabilities in the event of their commercial failure during the life of the admission agreement. Letting authorities are encouraged to make this part of any due diligence checks linked to the procurement process.

Letting authorities should keep under assessment the level of risks, even where these are negligible at the start of the contract, and the need for any subsequent bonds and indemnity cover for transferee admission bodies during the lifetime of all contracts. If, at the outset of the contract, a risk is identified, this should be closely monitored during the course of the contract. Local Government Pension Scheme and admitted body status.  As a matter of good practice, periodic reviews of any indemnity or bond provided should be considered in the light of the initial risk assessment and due diligence process. The review would be subject to the merits and circumstances of individual contracts and any need for a revision of the bond or indemnity is a matter to be decided locally by the letting or administering authority as appropriate.

Following award, the Employer pension contributions will be reassessed against the pension pot and risk to defecit. This needs to be considered as it may adjust the final labour costs within a tender submission where there is an increase to % requirements and therefore the annual budget. Most good contractors will highlight this within their submission and caveat this unknown increase as being passed on to the Public Sector Client, once calculated.

Determining the Employer % contribution. Employees pay a fixed percentage of their pensionable pay determined by reference to their whole-time equivalent pensionable pay. In conjunction with their actuary, an administering authority is required to establish a common rate of employer contribution to pay for the accruing pensions rights for employees that are members of that pension fund so as to secure its solvency and maintain as nearly a constant employer contribution rate as possible. In addition, the LGPS Regulations require that an individual adjustment to the common rate is made to address the particular circumstances of a body. The cost of establishing the likely employer contribution rate for an admitted body should be seen by letting authorities as a cost of the tendering exercise. The actuary will need, as soon as is reasonably practicable, to have details of the staff who are likely to be transferred to the contractor and the length of the contract. This usually comes from the outgoing contractor, via the Public Sector Client, or from the due diligence process undertaken by the incoming contractor.

The actuary will assess and set an employer contribution rate to apply from the date the contract is let or transfer of the function, based on the details of employees transferred, to ensure that the benefits which accrue to them are properly funded over the period of the contract. The contribution rate will be subject to review at each triennial actuarial valuation.

Where the incoming contractor is not a Local Authority service, any new employees entering the Contract services post award, will not be eligable to join the LGPS and therefore a lower pension rate and risk is attached to Auto-enrollment pensions and this can provide some labour savings, although clearly is less beneficial to employees.