Pension issues to considering when outsourcing Cory Blose – Employer Services Manager

Agenda Background Timescales Tender Document Costs Admission Process Key Decisions Ideal Process

Background Austerity Britain Public Sector becoming more creative with service delivery Previous outsourcing contracts coming to an end The Transfer of Undertakings (Protection of Employment) regulations (TUPE)

Background Why worry about Pensions? Best Value Authorities Staff Transfers (Pensions) Direction 2007 – LGPS or Broadly Comparable Scheme Fair Deal – LGPS only Obligations continue through all subsequent transfers

Timescales When should you contact LGSS Pensions? – Once commercial contract has been agreed – When preferred bidder is known – As soon as you are aware of a potential outsourcing Discussions about pensions early in the procurement process are essential – Prospective bidders will not be able to make an informed bid without Pension costs – Failure to consult pensions can lead to delays and complications Admission Agreements must be in place before the transfer date

Tender Document What Pensions information should be included in the tender document? – Requirement to secure Pension rights – Approach to Funding Liabilities – Contribution rate – Bond requirements – One off and ongoing costs Tender document should create a level playing field Pension Information Memorandum – Contribution Rate – Risk Assessment to inform Bond/Guarantor decisions

Costs (Procurement) Pensions Information Memorandum - Cost: £4,300. – Contribution Rate – Risk Assessment to inform Bond/Guarantor decisions Admission Process - Cost: £3100- £3500 – dependent on number of people transferring. Guarantor Liability

Costs (Potential Bidder) Assessment of Opening position - £1,000 Employer contribution rate – Including repayment of any deficit Potential strain costs – Redundancy, Ill Health etc Bond Premium – 3-5% of Bond value Risk Assessment/Bond Renewal - £2,300 Valuation - £550

Admission process Once preferred bidder established: Negotiate/Decide specific pension arrangements Provide Membership data and details of above to Employer Services team Actuarial Assessment Estimated ‘Schedule of Results’ Admission agreement signed prior to transfer date New employer starts paying contributions

Key Decisions DecisionRelevant Party Use LGPS or Broadly Comparable Scheme Admission Body Type of admission bodyAdmission Body Bond/Guarantor RequirementsFund/Letting Authority Open or Closed SchemeAdmission Body Pension assets to be transferred to the Admission Body Letting Authority Risk Sharing ArrangementsLetting Authority/Admission Body

Type of Admission Body Two main types of admission body: – Employer listed in 1a of Part 3, Schedule 2 E.g. charities, not for profit organisations with a community of interest with ceding employer, no time limit on contract – Employer listed in 1d of Part 3, Schedule 2 E.g. traditional outsourcing with private company and time limited contract LGSS Pensions will give guidance but Admission Body must ultimately decide on what type of employer they are Other types of employer – less common

Bond/guarantor requirements If the admission body ceases any deficit must be paid – What happens if the admission body can’t pay? Contractors/Traditional Outsourcing – Letting authority pays – Recommend a bond be put in place to protect the letting authority For all other admission bodies – Deficit falls on all other employers in the Fund – Fund requires a guarantor in all cases Provisions to be kept under periodic review

Open or closed admission? Will the admission agreement be ‘open’ or ‘closed’? – Open: allows new employees with the Admission Body to join the LGPS If employed in connection with the delivery of the service – Closed: only allows those employees listed in the admission agreement, at time of TUPE, to remain/join the LGPS This decision will have an impact on contribution rates and possibly the level of bond required

Funding Liabilities Pension assets and liabilities of staff transfer to admission body Decision to be made over the level of assets provided to admission body Fully Funded vs Deficit Sharing – Fully Funded = Assets match liabilities – Traditional outsourcing with private contractors should be Fully Funded

Funding Liabilities Question over where deficit should sit for others – May depend on relationship with admission body – Deficit sharing options will increase contributions and place a debt on balance books of the admission body Share of Fund = match funding level of letting authority Share of Deficit = prefund the deferred and pensioner members of letting authority then match remaining funding position

Contribution Rates Set by Scheme Actuary with consideration of: – Transferring liabilities – Length of contract – Strength of employer covenant – Open or Closed agreement – Deficit Recovery Exceptional Circumstances – Pass Through Agreements – Pooling/Stabilisation Reviewed at triennial valuation – May be reviewed more regularly

Risk Sharing Actuarial assumptions Redundancies Excessive pay increases Employer discretions Inflation Regulatory Change Early retirement costs Investment return Ill health retirements Mortality rates Discount rates Increasing member benefits Letting AuthorityAdmission Body Actuarial assumptionsExcessive pay increases Mortality ratesRedundancies InflationEarly retirement costs Regulatory changeEmployer discretions Discount ratesIncreasing member benefits Investment returnIll health retirements

Ideal process Contact us at earliest opportunity Request Pension information memorandum to inform business plan/tender doc Include full costs in tender document (inc. bond requirements) Inform us once you have a preferred bidder You start admission process (e.g. decide on asset allocation, bond/guarantor, open/closed)

Contact details Employer’s Team Cory Blose Employer Services Manager Beth Sargent Employer Liaison Officer Richard Sultana Employer Liaison Officer Mark McAuliffe Pensions Officer Jessica Fowkes Pensions Officer Tel: Web: pensions.cambridgeshire.gov.uk