Since 1999 a non-statutory framework has existed governing the treatment of employees’ pension benefits when best value authorities outsource services to the private sector. The framework requires outsourcing authorities to conduct contracting exercises (including retendering) on the basis that transferring employees be provided with an appropriate good quality pension arrangement for future service.
A contractor can comply with these requirements by obtaining admitted body status in the relevant fund of the Local Government Pension Scheme (LGPS) or by providing the employees with access to its own “broadly comparable” pension scheme.
The Secretary of State recently issued a direction to give statutory effect to the requirement for transferring staff to be provided with an appropriate good quality pension arrangement post transfer. This briefing note considers the requirements of the direction.
Why is the direction considered necessary?
Staff transfers from the public sector to the private sector are subject to Transfer of Understandings (Protection of Employment) requirements. Broadly speaking the TUPE requirements transfer the rights and obligations of employment from the transferor to the transferee. However, occupational pension provisions are (and have historically been) been excluded from the TUPE requirements.
As a result, there is currently a gap in the statutory protection offered to employees of best value authorities in respect of their pension benefits when such employees are transferred to the private sector.
The 1999 Fair Deal Guidance and the 2000 Statement of Practice provide transferring employees with a significant level of protection by setting out what is “best practice” for outsourcing authorities on this issue. However, these are guidance rather than statutory requirements.
The Local Government Act 2003 empowers the Secretary of State to issue directions to best value authorities prescribing the terms upon which the local authority’s staff are employed following the outsourcing of services. The direction has been made pursuant to this Act.
Which authorities does the direction apply to?
The direction applies to best value authorities in England and the police authorities in Wales. Broadly speaking best value authorities in England are local authorities, police authorities and fire authorities.
Which employees does the direction protect?
The direction increases the level of protection offered to employees of best value authorities, who are transferred into the private sector as part of either a first generation transfer or as part of a subsequent retender.
The direction does not enhance the position of new recruits who are employed by the contractor to work along side transferring employees in the provision of services. Such employees fall outside the scope of the direction.
What does the direction require?
The direction requires that when a best value authority enters into a contract with a person for the provision of services and those services are, immediately before the contract was entered into, provided by the authority, and carried out by employees of the authority:
- The contract between the authority and the contractor must require that the contractor provides pension rights for each transferring employee, which is broadly comparable to, or better than, those he or she had (or had the right to acquire) as an employee of the authority.
- The contract must provide that the transferring employee has the ability to enforce the right to broadly comparable benefits directly against the contractor.
- The contract between the authority and the contractor must require that broadly comparable pension rights are provided, if and when a contract is retendered.
When does the direction come into force?
The direction comes into force on 1 October 2007.
Historically it has not been a statutory requirement for best value authorities to require contractors to provide transferring employees with broadly comparable pension benefits post transfer. Nevertheless, best value authorities have typically required contractors to offer such pension protection to transferring employees, as part of the wider contractual provisions of the relevant service agreement. The direction is, therefore, in the majority of cases unlikely to make a great deal of difference in practice over the long term. However, there are two points, in particular, that are worthy of note.
Contracts between authorities and contractors are usually drafted so that they are the only parties who are able to enforce the contract’s provisions. The direction requires that transferring employees should themselves, be able to enforce the contractual provisions relating to the pension provisions against the contractor. This means that:
- Authorities must ensure that the provisions of their contracts offer this right of enforcement to transferring employees.
- Contractors should be aware that going forward transferring employees may be able to enforce the pension provisions of a contract directly against them.
Contractors who wish to provide the required level of pension benefits to the transferring employees through their own scheme, rather than obtaining admitted body status, must obtain appropriate certification from the Government Actuary’s Department (GAD) that their scheme meets the “broad comparability” test.
Public sector schemes, including the Local Government Pension Scheme (LGPS), currently are undergoing a period of significant change. These changes resulted in GAD early this year revoking all passports issued in respect of the LGPS prior to 26 April 2007. To obtain a new GAD passport contractors must, if they have not done so already, amend their schemes to reflect the forthcoming changes to the LGPS. This means that:
- From 1 October 2007, authorities will have a statutory duty to ensure that their contracts require contractors to offer transferring employees access to an appropriate good quality pension scheme post transfer.
- Contractors who have not amended their own schemes to reflect the forthcoming changes to the LGPS will not have the appropriate GAD certification to enable them to comply with the pension provisions of contracts, that going forward authorities will be required to impose.
To avoid unnecessary delays, contractors and authorities who are due to enter into contracts in the coming weeks and months, must ensure that pension issues are discussed at any early stage. This is so that each party understands the others position and the appropriate steps can be taken to comply with the direction’s requirements.