Current scheme employers considering outsourcing

Since January 2000 the LGPS regulations have provided for external organisations to enter into an admission agreement. This allows the staff who are transferred from their local government employment to either a private contractor or a trust based organisation, to stay in the Local Government Pension Scheme (LGPS) for as long as they are employed in connection with the service transferred as an alternative to a broadly comparable scheme.

Other staff who are employed by the external provider to work in connection with the delivery of the service transferred, may also be permitted to join the LGPS if the admission agreement allows this.

On 1st October 2007 the government issued the Best Value Authority Staff Transfers (Pensions) Direction 2007. This direction provides that where an authority enters into a contract with a person for the provision of services and those services are, in the period immediately before the contract is entered into, provided by the authority and carried out by employees of the authority:

• The contract between the authority and the contractor needs the contractor to secure pension protection for each transferring employee and provide that the provision of pension protection is enforceable by the employee
• Pension provision is secured so that the transferring employee, after change in employer, has rights to acquire pension rights that are the same as or broadly comparable to or better than those he/she had as an employee of the authority

The direction also requires similar pension protection for former employees of an authority, who were transferred under TUPE to a contractor, in respect of any re-tendering of a contract for the provision of services.

In the case of employees who are members of the LGPS, it's possible for the new employer to seek admitted body status within the LGPS so transferred staff continue to have access to that pension scheme for their future service.

The directive applies to ‘’best value authorities’ listed in section 1 of the Local Government Act 1999.

The direction is a statutory requirement and it's essential that officers who have responsibility for or have involvement in procurement, potential outsourcing of services to an external contractor of a trust based arrangement, discuss with us the pension implications affecting the staff and the authorities responsibilities under the direction.

Pension issues must be considered when drawing up the tender specifications and a decision should be taken by the authority if the tenderer will be need to enter into an admission agreement with the LGPS, or whether a broadly comparable scheme will be acceptable. The authority may decide only to invite tenders from external providers who are prepared to enter into an admission agreement.

Failure to consult with us at an early stage will create problems and delays during later stages of the process which may even become stalled if the external provider is not aware of their responsibilities about pension provision for transferring staff.

Once a decision has been made to outsource a service or establish a trust arrangement, we need to be told immediately. Details of the pension arrangements to be made available by the new external provider should be included in the tender documentation with details of the likely employers contribution rate which the external provider will have to pay if they agree to enter into an admission agreement, as well as the level of bond or indemnity which the external provider will need to put in place to safeguard the pension fund against any risk exposure which may occur as a result of the premature termination of the contract.

Our actuary will work out the new employer’s contribution rate and bond requirement and we will need details of the staff who will potentially transfer for this assessment to be carried out. A template of the information needed will be provided by us. The actuarial assessment will vary if the list of transferring staff differs at any time during the process. Please note that the cost for the actuary calculation will be in the region of £2,500 - £4,000 plus VAT and will be charged to the outsourcing employer unless we are informed of any alternative arrangements. 

Legal costs will also be charged to the outsourcing employer, unless we have previously been notified of any alternative arrangements, and are expected to be in the region of £1,500 plus VAT for the drawing up of the admission agreement. If a bond is also required, a further charge of £500 plus VAT will be incurred for the drawing up of the bond documentation. These costs could be higher if completion of all the legal pension documentation is delayed. The actual amount will be invoiced on completion of the matter.

Tenderers should be advised that if they intend to offer a broadly comparable scheme, they'll need to provide a current actuarial certificate to confirm the comparability of their chosen pension scheme. They'll also need to confirm, if they wish to apply for admitted body status, whether the admission agreement will be on an open or closed basis i.e. open to new employees employed in connection with the service transferred, or closed whereby only those employees transferred with the service provision are eligible for membership of the LGPS.

Where an admission agreement is to be entered into the parties to the agreement will be the employing authority (the transferor scheme employer) the external provider (the transferee admission body) and the pension fund administering authority. All parties need to work together to complete the process before the date of commencement of the contract.

Before signing the contract and the admission agreement the parties need to:

• Agree whether the admission will be open or closed
• Provide information to the fund actuary so the final employer contribution rate and bond can be worked out
• Agree the definition of ‘employed in connection with the service transferred'
• Make sure the employer discretions to be exercised by the transferee admission body under the LGPS regulations are published and sent to the transferee scheme employer and the administering authority
• Agree an appropriate bond or indemnity to protect the pension fund.
• Agree the terms and condition which will apply on the expiry or premature termination of the contract for whatever reason.

Once the admission agreement is in place and the contract has commenced, the parties to the admission agreement need to continue to liaise to maintain periodic reviews of the level of bond or indemnity, the employers contribution rate and in relation to any significant changes to the profile of the employee membership which may adversely affect the transferee admission body’s pension fund funding position.

It's important that the admission agreement includes provisions for the termination of the contract and or the admission agreement and the circumstances in which this may occur. It's also important to make sure the rights of the employees are protected.

A standard non-negotiable admission agreement and bond document are available at request.