Outsourcing a service to an external provider
If you are intending to outsource a service, for example, cleaning or catering which involves a TUPE transfer of either your employees or council employees to a new contractor, any staff who transfer and are members of (or have the right to be members of the LGPS) will continue to have the right to have access to the LGPS through the new provider joining the LGPS. Before going out to tender, academies are required to seek permission from the Department for Education.
Therefore pension needs to be factored into the procurement process so that all bidders are aware of pension risks and the requirement to become an admitted body in the LGPS. This will allow bidders to correctly price pension costs into their bid.
To facilitate this, an Admission Agreement will be required between the contractor, the academy and the pension fund. By being a party to the Admission Agreement the academy could be liable for the contractor’s pension liabilities should they default.
This risk to the academy can be mitigated by requiring the contractor to take out a pension indemnity bond or a parent company guarantee. Contractors should also be made aware of the potential requirement to take out a pension indemnity bond as part of the procurement process.
Further information for outsourcing
A TUPE transfer of employees who are members of or are entitled to be members of the Local Government Pension Scheme (LGPS) must adhere to the principles laid out in the HM Treasury issued revised ‘New Fair Deal” guidance that re-sets the pension protection requirements for staff compulsorily transferring from the public sector to independent providers delivering public services under TUPE.
New Fair Deal applies directly to central government departments, agencies, the NHS, maintained schools, academies and any other part of the public sector under the control of Government ministers where staff are eligible to be a member of a public service pension scheme.
A link to the full document can be found here. www.gov.uk/government/publications/fair-deal-guidance
Outsourcing a service currently provided by Academy or Council employees
When an academy outsources a service to an external provider involving a TUPE transfer of either Academy or Council employees who are members of the LGPS, the contractor has two options to provide and protect the pension provision for the transferring employees.
Option 1 – Admitted Body Status (ABS)
Bidding contractors can apply for ABS in the Fund, but it is important to note that academies letting a contract, cannot force a contractor down the ABS route. Ultimately it is for the contractor to decide how it wishes to meet its pension protection obligations, but it would be expected that such decisions should be taken following discussion with the letting employer. Bidders not wishing to pursue the ABS option and who cannot provide a suitable broadly comparable scheme should be excluded from the tendering process.
Option 2- Broadly Comparable Pension Scheme
Broad comparability relates to the protection of transferring employees’ future pension rights. This is to ensure that transferring staff are entitled to pensions in respect of future service that are worth as much as they would have had, were they to have remained with their original employer. For a pension arrangement to be assessed as being ‘broadly comparable’ to the LGPS scheme, it does not need to offer identical benefits. However, it must offer the same range of benefits, with the same (or greater) overall value.
Academies are advised to ensure bidders, who intend to offer an alternative pension scheme to the LGPS, inform the Pension Fund early in the procurement process and advise details of the scheme they will use to establish broad comparability. This is because the pension scheme put forward by the contractor as broadly comparable should be assessed by an actuary in accordance with the Government Actuary’s Department’s Statement of Practice.
If the potential contractor cannot provide a broadly comparable scheme or the proposed pension scheme has not received the relevant actuarial approval, the only other option for the contractor is to seek admission to the LGPS as an Admitted Body.
Key stages (Steps) to achieve ABS
Data for an actuarial assessment – Depending on the number of employees affected the Pension Fund will require data on the employees transferring to a) calculate an employer contribution rate for the contractor, b) calculate an appropriate level for the indemnity bond and c) calculate the amount of pension liabilities and assets transferring to the contractor.
To enable the actuary to produce these outputs, the pension fund must be provided with the details of the eligible LGPS staff transferring. The Pension Fund will issue a data capture spreadsheet at the outset of the process and this must be completed in full and returned to the Fund.
Employer rate – In most cases as the number of staff transferring is relatively small the employer contribution rate will be set at the same rate as the current employer, you are advised to confirm this amount before embarking on the tender process, although in some instances Cheshire Pension Fund will provide the actuary with membership data who will calculate a suitable employer contribution rate. This will depend, in particular, on the age profile and service history of the transferring employees. If this happens there will be a charge.
Admission Agreement – Successful contractors who wish to be admitted to the LGPS will be required to enter into a formal admission agreement. The admission agreement is a tripartite agreement between the Academy, the contractor and the Pension Fund. The contractor and those employees covered by the agreement will be subject to the standard LGPS legislation and all employees will be required to be enrolled into the LGPS by the new contractor.
There is a charge of £1,300+ VAT for the admission to the pension fund and this will be recharged to the contractor on
entry to the fund.
Indemnity Bond – the Pension Regulations also require that an assessment of the level of risk to the Fund on the premature termination of the agreement is carried out. The risk assessment needs to be carried out to the satisfaction of the Pension Fund authority and the assessment is typically undertaken by the scheme actuary. The bond is to protect the Academy and other employers in the Pension Fund from meeting any pension liabilities should the contractor be unable to fund them if they (for example) go into administration or liquidation.
The contractor should consider and factor in the cost of obtaining a bond as a cost of providing the service.
There is a charge of up to £1,750 + VAT for the calculation of the bond amount this will be recharged to the academy letting the contract. Academies are therefore advised to budget for this cost as part of the overall costs of tendering the service.
Employee options – employees with previous service in the LGPS will have their membership transferred to the contractor on a day for day basis and the employee is fully protected in terms of pension provision. Employees who are ‘auto enrolled’ as a result of the new admission agreement may elect to opt out of the scheme by following the required process.
The service contract must provide that the contractor shall secure pension protection for each transferring employee and this protection must be enforceable by the transferring employer.
Similar protection should also be provided if employees transfer to another employer as a result of re-letting the contract. The re-let service contract with the new contractor must provide that the new contractor shall secure ‘pension protection’ for each transferring original employee.
Pre Contract Award stage
Certain data should be provided to the Cheshire Pension Fund at the pre tender stage; for example a list of employees to be transferred, pay details and date of start of the contract etc. It should also be made clear to all parties that pension liabilities accrued prior to the start of the contract will not be charged to the contractor.
Information in relation to employer contribution rates, indemnity bond values and entry charges for Admitted Body Status should be included in the tender documentation. Having this information at the start of the process will enable bidding contractors to decide whether they wish to pursue the ABS option or, offer a comparable pension scheme. This decision is important for the potential contractor as without this information they will be unable to factor pension costs accurately into their bid.
The academy will be able to assess the contractors’ bids at the outset based on the proper financial information on pension costs and liabilities.
Academies considering outsourcing a service should contact the Pension Fund at the earliest opportunity to ensure that any pension implications are understood and considered at the outset of any tendering process.
This will ensure that the academy can factor in any pension issues and costs in their tender documents and potential contractors can price these costs accurately into their bids. This will avoid potential and unnecessary delays and complications at later stages of the tender process or after the contract has been awarded.
Academies receiving a bid from a contractor offering a comparable pension scheme will need to send details of the scheme to the Pension Fund as soon as possible. Approval of the scheme’s comparability will need to be sought to continue with the bidding process.