In recent months there has been a considerable amount of coverage about the Government's desire, whe...
In recent months there has been a considerable amount of coverage about the Government's desire, where services are outsourced from local authorities, to allow private sector employers to participate in the Local Government Pension Scheme (LGPS). At the same time the Government is introducing the best value regime and is proposing to amend the Transfer of Undertakings (Protection of Employment) Regulations 1981 (TUPE) to include pension rights.
The decision to allow private sector contractors to participate in the LGPS was hailed as a welcome change which would go a long way to removing the difficulties experienced by local authorities outsourcing to the private sector.
Prior to the changes to the LGPS, staff who had their employment transferred to a contractor under an outsourcing arrangement would have had to leave the LGPS. The local authority concerned would normally try to ensure the contractor set up a broadly comparable pension scheme. The transferred staff would then have the option of joining this scheme and the possible option of transferring their benefits accrued in the LGPS into the new scheme.
However, while the intention was for local authorities to ensure a broadly comparable scheme was provided, this did not always happen. In February 1999, an agreement was reached by the United Kingdom Steering Committee on local government pensions with representatives of both the Trades Union Congress (TUC) and the Confederation of British Industry (CBI). The agreement was to enable staff transferred out of the public sector to be able to remain members of the LGPS. All that was now required were amendments to the LGPS to allow this to happen.
From 1 April 2000, the Compulsory Competitive Tendering regime, introduced in the early 1980s, is to be replaced by a statutory duty on local authorities to provide 'best value' in the provision of its services. In January, the Department of Transport, Environment and the Regions (DETR) published the final regulations to amend the existing LGPS provisions.
The new regulations will affect all contracts entered into after 13 January 2000 and will allow private sector employers to participate in the LGPS. This will in turn allow local government staff who transfer to the private sector under best value arrangements to remain in the LGPS.
Currently, employers participating in the LGPS are either the local authority themselves or public service bodies which have entered into an admission agreement and become an admission body. The amending regulations introduce a new category of admission body, called a 'transferee admission body'. Private sector employers wishing to participate in the LGPS will fall into this new category. Only employees who are transferred in by connection with a best value arrangement will be allowed continued membership of the LGPS.
On the face of it, qualifying as a transferee admission body would appear to be a fairly straightforward matter and would appear to be a good deal for employers. All the employer needs to do is enter into an admission agreement with the Local Authority and their employees can then remain in the LGPS.
Reality of situation
However, whilst the principle of entering into an admission agreement would appear to be simple, the reality of entering into one is likely to be somewhat more complicated.
Whilst these requirements may not appear to be overly complicated, there are a number of hidden issues which need to be appreciated. The method and assumptions to be used in determining the contributions and payments into the fund, and the level of cover required by the indemnity, are not specified in the regulations. Instead, it is left to the actuary of the relevant LGPS fund to determine what they should be and it has been reported that they are not negotiable.
As it is down to the LGPS actuary to determine the assumptions, it is possible that those used are not necessarily the most up to date. For example, the contractor's contribution rate could be determined using assumptions used in the last actuarial valuation which may have taken place up to three years before.
By using out of date assumptions there is an increasing risk they will not be borne out in the future. If this happens the contractor will face continuing increases in contributions as the cost of benefits proves to be higher than allowed for in the contribution rate. The contribution rate will also include adjustments for gains and losses in respect of all accrued benefits - including those accrued before the contract start date.
The LGPS actuary will determine an amount of assets to be 'transferred' to the contractor's part of the fund in respect of benefits already accrued. Unlike a typical private sector transfer, there will be no opportunity for the contractor's actuary to negotiate the appropriateness of the method and assumptions used in determining the asset transfer. It has been reported that the actual amount needed to meet the accrued liabilities could be 15-20% more than the amount offered by the LGPS actuary.
Further problems could arise if the LGPS actuary chooses to adjust his/her assumptions at the next valuation. If this happens the contractor could be faced with a sudden and unexpected increase in its contribution rate. Using different assumptions could also result in a past service shortfall where previously one did not exist.
A further liability could also materialise at the end of the contract because the contractor is required to meet any shortfall with a one-off payment.
This payment will be determined by the LGPS actuary and there is nothing to prevent the actuary calculating this payment on a different basis than used for the ongoing contribution rate. This could mean the contractor could be faced with a significant final payment at the end of the contract even if it has paid all the contributions due during the lifetime of the contract.
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