UK: Winning Contracts From The Public Sector

Last Updated: 31 March 2010
Article by Christopher Murray

Many RPs tender for contracts outsourced from the public sector. Pension commitments associated with these contracts go beyond the standard TUPE requirements that apply to private sector transfers.

Updated guidance for Best Value Authorities was published in December 2009 but experience suggests that some authorities are not as familiar with this (or previous guidance) as they should be. This leaves RPs exposed to the risk of taking on potential liabilities that they would not have acquired had the letting authority adhered to issued guidance.

Pension Options

There are two options available to contractors: adhere to the public sector scheme through 'admitted body status' (local government pension scheme (LGPS)) or 'direction status' (NHS scheme), or offer a private scheme that is deemed to be 'broadly comparable'.

The LGPS is a funded scheme with a core funding rate for each local authority. Variations to this will apply to each participating employer, reflecting its membership profile and associated liabilities.

The NHS scheme is unfunded, so no funding deficit can be identified, whether before or during the currency of a contract. Unsurprisingly, it has become difficult to secure approval for contractors to participate in this scheme so a comparable scheme is likely to be needed.

Admitted Body Status – LGPS

If guidance is adhered to, participation in the LGPS should not generate contractor liability for any past service funding deficit when the contract commences. Benefits accrued during the lifetime of a contract are the responsibility of the contractor and the administering authority's actuary will identify any shortfall payable on expiry.

Unexpected Risks

There is a real risk of creating an additional deficit in respect of previous LGPS service where, for example, higher pay increases are granted than would have applied in the public sector. Those with substantial past service will have the biggest impact, so contractors need to exercise caution.

Not all authorities are as familiar with their guidance as one might expect. It is therefore essential to ensure that accrued liabilities are properly funded by the letting authority and that no liability for an existing funding deficit is acquired following a successful tender.

'Broadly Comparable' Scheme

The Government Actuary's department (GAD) decides what is 'comparable' and issues a certificate to this effect, either covering a single transaction (individual assessment) or multiple transfers (GAD passport). A passport will cover all transfers from the same sector within a limited period (around two years).

A scheme that is deemed broadly comparable does not have to replicate exactly the corresponding public sector scheme but it does have to contain the same type of benefits, with a total value of not less than those provided under the original scheme.

Transfer Value

Unlike participation in a public sector scheme, a scheme that is broadly comparable must accept past service liabilities for anyone who wishes to transfer their accrued rights into the private scheme. This is achieved by payment of a transfer value, normally covering all requested transfers in a single transaction.

Contractors have no say in the calculation of transfer values, which are not negotiable. This means that they could create a funding deficit from inception. It is therefore essential to involve an independent actuary at an early stage of the contract negotiation process, so that appropriateness may be assessed.

Should the actuary feel that the transfer value available is lower than needed to cover projected liabilities, an adjustment to contract pricing may be possible. It is therefore appropriate to consider this aspect of scheme funding at an early stage of negotiations. This will generally entail communicating with both the letting authority and the administering authority simultaneously to keep both parties informed.

In practise, few employees choose to transfer to a private scheme, even though this means being treated as a leaver under the public sector scheme that holds their accrued benefit entitlement.

The Best Option?

There is no solution that fits all circumstances. In general, if employments are being transferred from the NHS and the NHS scheme will allow participation through direction status, it is difficult to find a reason not to apply for it.

Where employees are members of the LGPS there are various aspects to consider, depending on the chosen method of future pension provision. Admitted body status is likely to be readily available but the treatment of past service liabilities and the lack of control over funding assumptions give rise to concern.

Providing a comparable private scheme also carries risks, including higher servicing costs (professional advisers, administrators, etc). An area where a GAD passport scheme could pay dividends is when there is an intention to compete for multiple tenders in order to grow the business. The availability of a passport scheme will generally facilitate the negotiation process and the added flexibility that this provides can help to win tenders.

There is no substitute for professional advice when considering the pensions aspects of a particular tender.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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