Outsourcing options
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.
Option 1- 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 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.
Option 2 – Admitted Body Status (ABS)
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.