In this section
Guide to outsourcing
This area has been split into two different types of employer and the protocols around outsourcing.
To find out more click on the links in our existing employer section.
Maintained Schools
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.
Fair Deal
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.
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.
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.
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.
Summary
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.
Councils and other employers
Outsourcing a Local Authority Service
When a Scheme Employer outsources a service to an external provider involving a TUPE transfer of staff, the contractor has two options to provide and protect the pension provision for the transferred employees.
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 a public sector pension 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.
Letting authorities are advised to ensure bidders, who intend to offer an alternative pension scheme to the LGPS, inform them 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.
In cases where a broadly comparable pension scheme is available, bulk transfer arrangements can be considered. Letting authorities will need to let potential contractors know what the available bulk transfer terms are and ensure that accrued service transfers on a day for day (or equivalent) basis. Cheshire Pension Fund and the Actuary will have to be involved in the process very early and letting authorities will be required to bear the actuarial fees incurred.
Employee options – employees will have the choice of whether to transfer their benefits in the LGPS to the new company’s pension scheme or not. It is not compulsory to transfer and they can retain their option to defer benefits in the LGPS. Scheme membership transferred to the contractor’s pension scheme may not always count on a day for day basis where bulk transfer terms are not agreed.
If the potential contractor cannot provide a broadly comparable scheme or the scheme has not received the relevant actuarial approval, the only other option is to seek admission to the LGPS as an Admitted Body. Bidders not wishing to pursue the ABS option who cannot provide a suitable broadly comparable scheme should be excluded from the tendering process.
Bidding organisations can apply for ABS in the Fund, but it is important to note that scheme employers letting a contract, cannot force a company 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 would be taken following discussion with the letting authority.
Data for the Fund Actuary – the letting authority must provide details of the eligible LGPS staff transferring. Cheshire Pension Fund will issue employers with a data capture spreadsheet at the outset of the process and this must be completed in full and returned to the Fund before the actuary can be engaged.
Employer rate – from the returned data, 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. An ageing workforce with average service history of say 20-30 years would imply a higher rate than one with younger members with shorter service. The approach to funding liabilities during the course of the contract will be clear to potential bidders.
Indemnity Bond – the regulations also require that the letting authority carry out an assessment of the level of risk to the Fund on the premature termination of the agreement. The level of the bond can also cover the redundancy costs on premature termination and the risk of a deficit on termination. The risk assessment needs to be carried out to the satisfaction of the administering authority and the assessment is typically undertaken by the scheme actuary and is part of the overall ABS package.
Admission Agreement – Successful contractors who wish to be admitted to the LGPS will be required to enter into a formal admission agreement and will become a TAB. The TAB and the employees covered by the agreement only will be subject to the standard LGPS legislation.
Please note there is a cost for the actuarial work and this is borne by the scheme employer letting the contract as a cost of the tendering exercise.
Employee options – employees will be able to remain in the LGPS and transfer their membership. It will reckon on a day for day basis under ABS in the LGPS and the employee is fully protected in terms of pension provision.
Pre Tender Protocols
We have already identified that certain data should be provided by the scheme employer 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. Letting authorities should also make it clear to all parties that that pension liabilities accrued prior to the start of the Contract will not be charged to the new employer.
Information received from the fund’s actuary in relation to employer contribution rates and indemnity bond values for Admitted Body Status must be included in the tender documentation. Having this information at the start of the process will enable bidding organisations 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 accurate pension costs into their bid.
The scheme employer will be able to assess the company bids at the outset which will be based on the proper financial information on pension costs and liabilities.
Summary
Employers considering outsourcing a service should contact Cheshire Pension Fund at the earliest opportunity to ensure compliance with the necessary protocols and legislative requirements. Ensuring that the relevant data is ready and available to be sent to the fund actuary for the setting of the new employer rate for ABS at the pre tendering process is critical.
Employers receiving a bid from a company offering a comparable pension scheme will need to send details of the scheme to Cheshire Pension Fund as soon as possible. Approval of the scheme’s comparability will need to be sought to continue with the bidding process.
If you have any questions or queries about pension matters that could affect a contract let, please contact The Fund immediately for advice.
