Publications

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From 1999, 'admitted body status' (ABS) has enabled local government employees to continue accruing benefits in the Local Government Pension Scheme (LGPS) when their jobs are transferred to the private sector.

On 16 December 2009, the Department for Communities and Local Government (DCLG) issued new guidance (Guidance) on the ABS framework within the LGPS.

The Guidance, 'Admitted body status provisions in the Local Government Pension Scheme when services are transferred from a local authority or other scheme employer', as the rather utilitarian 'does what it says on the tin' title implies, sets out how to deal with transferring employees' pension arrangements where services are transferred from a letting authority to a private sector contractor. It lists critical issues which contractors should consider before applying for LGPS admission. It also summarises the roles of key parties: the administering authority (who administers the relevant Fund of the LGPS), the letting authority and the contractor.

The Guidance has attracted criticism, however, for failing to tackle what many consider to be the most critical of outsourcing issues; 'cost sharing', that is, how letting authorities and contractors can and should share pension costs and risk in these circumstances. Industry concerns persist, primarily surrounding the uncertain (often disproportionate) cost of providing these benefits.

What the guidance says

The Guidance outlines how to handle workforce matters generally, briefly addressing two tier workforce issues; its main focus, however, falls to the ABS provisions and confirms:

• the contractor is free to choose between ABS and provision of a broadly comparable scheme;
• the differences between 'open' and 'closed' admission agreements;
• when a bond or indemnity may be required and reviewed;
• when admission agreements should be dated/notification requirements;
• details of the pre-termination procedures for an admitted body;
• how LGPS contribution rates are set/reviewed and what the actuary needs to know about transferring staff;
• guidance on content of contractor policy statements (how it will make decisions on the various employer discretions available under the LGPS).

Notable omissions (what the guidance does not cover)

The Guidance does not:

• consolidate the associated Fair Deal guidance safeguarding employee pension arrangements, the Two-Tier Code aimed at preventing terms and conditions which create inequality between staff working side by side on public sector contracts and the 2007 Best Value Direction;
• set out a standard template for admission agreements;
• address secondary and onward transfers in detail;
• fully answer the CBI's call for guidance which prevents or discourages contractors from being required to take on risks outside their control.

Risk sharing

The Guidance recognises that potential risks associated with pension provision (eg, change in pay and conditions of service, mortality assumptions, market performance and ill health retirement assumptions) can cause uncertainty for local authorities and contractors.

In a report issued in June 2009 ('Reforming pensions practice in public services contracting'), the CBI called for better guidance for contractors on evaluating pension aspects of bids to achieve 'genuine like-for-like comparisons of pension costs' and 'tackle poor understanding' of risks and consequences for the private sector.

The Guidance declines the opportunity, however, to adopt a standardised approach to risk sharing that places risk where it can be most effectively managed. Instead, it recommends that the letting authority and contractor discuss the best way to manage potential risks with the Fund's administering authority and actuary. Although this reflects the consultation consensus that risk sharing mechanisms should be dealt with in the contract and not the admission agreement (excluding them from the scope of the Guidance), many critics believe that letting authorities and contractors are no less polarised as a result. The consultation consensus on risks that should be retained by letting authorities or transferred to contractors is included in the Guidance, as set out in the table below.

Letting Authority	Contractor
Actuarial assumptions	Pay increases > local govt levels
Mortality rates	Redundancies
Inflation	Early retirement costs
Regulatory change	Discretions
Discount rates	Augmentations
Investment return	Ill health retirements

Status of the guidance

DCLG dismissed broader regulatory changes (eg adopting a 'pass through' system, so that contractors would only contribute for membership accrued during the contract), in favour of retaining the current framework and issuing revised guidance, to maximise flexibility.

The Guidance is authoritative, but is not statutory; there are no sanctions if it is not followed. However, the statutory obligation on letting authorities to ensure that outsourcing contracts give transferring employees the right to acquire pension benefits either 'the same as, broadly comparable to, or better than' those enjoyed prior to the transfer (under the Best Value Authorities Staff Transfers (Pensions) Direction 2007), should mean that contractors will need to follow the Guidance in order to improve their chances of a successful bid.

Key actions for letting authorities and contractors

Pensions should be considered early in the process (ideally before or at the start) and discussed openly between the parties. Both the letting authority and the contractor will need to assess the financial risks of entering into any admission agreement. There is a strong steer in the Guidance for both letting authorities and contractors to take specialist advice.

What does the future hold for ABS?

The lack of a more sweeping regulatory change means that risk sharing mechanisms still need to be dealt with as part of contract negotiations, despite CBI calls for a standardised approach (eg, making such mechanisms mandatory or introducing a default option), which could simplify contract negotiations and reduce costs and uncertainty.

DCLG plans to further consult on a range of issues, including:

• whether or not the ABS provisions are sufficiently flexible to deal with scheme employers in merger scenarios or where employers go into administration;
• introducing a period of employment prior to formal admission which can be counted as membership of the LGPS (there being sometimes a delay in ABS being obtained); and
• removing the existing requirement that any question about the construction of an agreement is referred to the Secretary of State, as this rarely happens in practice.

On the whole, this all sounds largely positive: DCLG is keeping a watchful eye on what works, and continues to consult with the Industry and parties with most exposure to the ABS provisions. Further changes are doubtlessly needed, however: ultimately, some difficult decisions will be required.