The Department for Communities and Local Government has published new guidance on admitted body status when services are transferred from a local authority.
New guidance from CLG provides a single source of information for those involved with staff outsourcing from the LGPS, particularly those choosing the admitted body status (ABS) route.
The new guidance follows a lengthy consultation exercise and input from a specially established advisory group made up of LGPS employers, the unions, the CBI and pensions industry professionals. The result is a document that is a comprehensive summary of the practical steps a contractor needs to take to satisfy the ABS requirements within a public sector contract bid. The roles of the key parties in the ABS process (local authority, administering authority and contractor) are all outlined as well as guidance on key areas such as:
Setting and managing employer contribution rates.
Managing risk and dealing with discretionary policies.
What to do when the contract ends, and how to deal with surplus and deficit issues.
The role of the bond and indemnity.
This legal update analyses the main points in the guidance, with additional comments from Martin McFall, partner in Trowers & Hamlins LLP.Close speedread
Following consultation on the admitted body status (ABS) provisions in the Local Government Pension Scheme (LGPS), the Department forCommunities and Local Government (CLG) has published revised guidance for:
Local authorities of other scheme employers responsible for letting contracts.
Contractors: private and third sector companies and organisations.
Actuaries: acting for authorities and external providers.
Trade unions: representing transferring employees and new joiners.
LGPS members: transferring from local authorities or being offered the LGPS under a new provider.
Where a transfer of services (and associated employees) takes place from a local authority or another LGPS scheme employer to a third party contractor, the contractor is required to provide certain pension benefits to the transferring employees. The benefits provided must be given through a pension scheme that is broadly comparable or by the contractor becoming an "admission body" that is, a participating employer for the purposes of the LGPS.
For more information on ABS and broadly comparable schemes, see Practice note, Public-sector pension schemes: outsourcing (www.practicallaw.com/8-205-6270).
CLG identified concerns that had been raised about the pensions aspects of the contracting process, in particular:
A lack of control and an undesirable volatility for contractors over pension risk, which may lead to contractors paying large termination payments when exiting the LGPS or paying higher contributions to the LGPS than they had thought at the beginning. This would potentially have the knock-on effect of making contractors more cautious and, potentially, their bids less competitive.
The potential for "backdoor compulsion" from local authorities on contractors to offer ABS instead of a broadly comparable scheme.
Most of the respondents to the consultation agreed that revised guidance would help improve understanding of the ABS provisions.
For more information on the consultation, see Legal update, LGPS: responses published to the consultation on the admitted body status provisions (www.practicallaw.com/5-383-5868).
The previous guidance on such matters was withdrawn several years ago, and since that time practitioners have not had a definitive guide to standard practice in this area. The new guidance consolidates information on the ABS process in one document.
The new guidance restates the original intentions behind the ABS provisions as well as providing a framework for contractors to manage their practical and financial responsibilities throughout the ABS process.
Also provided is a helpful list of the respective roles of the administering authority, the local authority letting the contract, and the contractor, as well as excerpts of the relevant legislation governing the ABS process.
The guidance confirms that the choice of whether to become an admitted body or to offer a broadly comparable scheme should lie with the contractor. While local authorities should make clear that pension rights need to be secured before the contract is let, they should not stipulate ABS as a requirement of the tendering process. While the main route for becoming an admitted body is by approval from an administering authority the guidance clarifies the position where there is no outsourcing contract (the contractor is providing public sector services on their own account) where approval from the Secretary of State for Communities and Local Government may be granted.
The guidance is clear that the contractor should not normally be liable for pension liabilities accrued prior to the start of a contract (the qualification may be to take account of the model position from Partnerships for Schools in the "Building Schools for the Future" agreements. Pension liabilities which occur over the course of the contract should be paid by the end of the contract, and this will include the cost of any increase in past service liabilities, for example, where the contractor has increased pay beyond that paid by the letting authority. Also confirmed is that a return of any surplus to the contractor at the end of the contract is not possible. Therefore contractors should work with letting authorities in advance of the end of any contract to eliminate any surplus. This is in line with CLG's intention that there should be "no surprises either during or at the end of the contract".
A statement about how assets and liabilities for transferring employees (giving details of how the actuarial aspects of ABS will be treated), should be included in the pre-bid documentation given to potential contractors if possible.
The guidance makes clear that pensions issues should be considered very early on in the procurement process. The importance of establishing a procedure for assessing (and reviewing) employer contribution rates is emphasised. For the contractor this will be a key part of pricing its bid. The guidance confirms the cost of setting this rate falls to the local authority and it is their actuary who will determine the applicable rate. The guidance seeks to steer a middle course in relation to the allocation of risk transfer between the letting authority and the contractor. It would have been preferable for the guidance to elaborate on some additional aspects of risk transfer, such as the responsibility for, and treatment of, past service deficit liability during the course of the contract.
Matters such as changes in pay, conditions of service, stock market performance and mortality assumptions can cause fluctuations in the LGPS' funding. A suggested framework for how such risks are allocated between the letting authority and the contractor is included. Areas such as benefit changes and ill-health retirements usually fall to the contractor but each outsourcing may address these individually where the risk may be shared or passed back to the contracting authority. Ultimately the guidance acknowledges that it is for the parties to use the mechanism that they consider most appropriate in the circumstances.
The need for the parties to address the role of LGPS employer discretions is highlighted. Although the contractor is not required to adopt the same policies as the letting authority, it needs to publish its policy on how it intends to exercise LGPS employer discretionary policies, for example, granting extra membership to members, agreeing to flexible retirement.
The ABS process requires a letting authority to assess the level of risk arising on the early termination of the contract on the contractor's insolvency. Depending on the result of this review, the contractor may be required to provide an indemnity or a bond to meet that risk. The guidance details the process as well as advising a regular review of the risk to assess the suitability of the bond or indemnity in place. The accords with the market practice that pension bonds are generally only available in the bond market place for periods up to three years before renewal is needed.
While the new guide is a useful summary of current practice, CLG missed an opportunity to clarify and address some of the ambiguities and shortcomings within the 2004 Fair Deal for staff pensions (www.practicallaw.com/9-367-9960) guidance. Although the Fair Deal was developed as umbrella guidance for both central and local government outsourcings, the guidance with its focus on ABS issues could have addressed and clarified some of the pertinent issues that Fair Deal fails to tackle.
One criticism of the guidance is that it has not recognised the difference in procurement approach taken for different types of outsourcing contracts. Whilst it is right and proper for the guidance to comment that approaches to risk management are best agreed during contract negotiations, it could have acknowledged that this is easier to apply when contractors are bidding as part of a competitive dialogue process. Where contractors are obliged to follow the restricted procedure procurement model, as commonly applied under term partnering contracts for repairs and maintenance contracts, at bid stage there is commonly little or no room for any negotiation of pensions risk sharing. Development of risk transfer negotiations under the restricted procedure often only occurs, if at all, when preferred bidder "at the altar" discussions take place. The guidance could have recognised the various procedure models to assist bidding contractors achieve transparency in the bidding process.
Whilst the guidance is prepared specifically for the scenario where services are transferred from a local authority, it would have been welcome if it could have clarified the position in respect of housing stock transfers. These transfers usually involve TUPE transfers of staff from the local authority to housing associations to manage housing stock. The commonly held view is that as the local authority is not outsourcing a service but rather transferring housing stock, then the statement of practice and Fair Deal guidance does not apply. However, there is often a divergence of views as to whether that protection applies by reliance upon the operation of the guidance or only where the contract stipulates such compliance.
Perhaps the most significant omission is any comment on the issue of pass-through, which may be disappointing to some contractors. "Pass-through" means having some element of risk sharing between the local authority and the contractor which could be effected by, for example, agreeing that employer's contributions (at a pre-agreed rate, subject to the contractor not, for example, increasing member salaries above a particular amount) will be the only amount payable by the contractor to the LGPS. The potential advantage of these arrangements is that, in providing more certainty to contractors and giving them more clarity as to pension costs, ABS and bidding for local authority contracts might become more attractive propositions. This could mean an improvement in the value that such contracts provide for local authorities. If pass-through is to become an option, it is possible that this would be considered as part of broader regulatory change and not simply a matter for revised guidance.
For more information on "pass-through" see Practice note, managing pensions risk in local authority outsourcing transactions (www.practicallaw.com/5-382-4153).
Admitted body status provisions in the Local Government Pension Scheme when services are transferred from a local authority or another scheme employer, Department for Communities and Local Government, 16 December 2009.