The Department for Communities and Local Government (DCLG) has now published the results of the consultation commissioned in January 2008 regarding the Admitted Body Status (ABS) provisions in the Local Government Pension Scheme (LGPS).
The ABS provisions were introduced in 1999 in England and Wales to enable contractors who take on local authority contracts to participate in the LGPS, such that outsourced staff continued to participate in the LGPS even though their employment transferred to the contractor.
Concerns had been raised by interested parties (stakeholders) that these provisions needed updating in order to deal with perceived problems such as authorities requiring contractors to adopt ABS in order to win contracts and the various costs and risks taken on by contractors in providing pension benefits.
Please see our alert from February 2008 on ABS consultation for further details of the original consultation, which set out three possible approaches for admitted body status going forward:
- Approach 1 focused on whether revised guidance would assist in developing a better understanding of the provisions.
- Approach 2 questioned whether the existing framework could be retained but improved in certain key areas by making minor regulatory modifications.
- Approach 3 questioned whether broader regulatory changes in specified areas would be more effective in managing risks associated with pension provision. 73 responses to the consultation were received. We have provided a summary of the consultation report below in relation to each of these three approaches
Approach 1 - Should there be revised guidance?
The vast majority of respondents considered that revised guidance would improve understanding of provisions and ensure that all parties had the same understanding during negotiation. Views on the status to be given to such guidance (authoritative or statutory) were evenly split.
Approach 2 - Would minor regulatory modifications make the existing framework work better?
Overall, 50% of respondents thought that minor regulatory amendments would be useful, though some respondents expressed reservations as to whether minor changes would fully address the concerns raised about the current regime and others considered that more fundamental changes would be required.
What about regulatory changes to refund any surplus?
50% of respondents were in favour of including regulatory provision to specifically deal with any surplus at the end of the contract. A number of respondents expressed that they were reluctant to make refunds from LGPS funds and that contribution rate adjustments should be considered as a way of ensuring the contractors are treated more consistently with Scheme employers.
…or changes to introduce annual monitoring of contracts and annual reviews of indemnities?
More than 50% of respondents did not support these ideas, citing increased cost and bureaucracy for little reward.
…or to require the authority to publish statements about the actuarial aspects of ABS?
Nearly three quarters of respondents thought that letting authorities should provide a statement about actuarial aspects of ABS as part of the bidding process in order to improve transparency, and to provide contractors with information about the potential liabilities they are likely to take on as part of the outsourcing contract.
Approach 3 - Would broader regulatory modifications better support the management of pension risks and address cost implications?
The consultation considered whether broad changes in three specific areas would support the effective management of pension risks:
Allowing for "pass-through" of pension costs
Over 70% of respondents considered that arrangements whereby contractors only contribute for membership accrued during their contract, with no liability for past service nor with any ongoing liability at the end of the contract, should be seriously considered.
In terms of which risks should be apportioned to contractors and to letting authorities, respondents tended to suggest that risk should be placed where it can be effectively managed and controlled, with mixed views as to whether the allocation of risk should be standardised or flexible to permit variation in particular circumstances.
Respondents' views as to who should be liable for pension costs occurring due to changes in actuarial assumptions which are not scheme related were varied, with letting authorities, administering authorities and pension fund respondents having contrasting views to those of private and third sector contractors.
In relation to what effect contractor decisions should have on past liabilities, overall, respondents agreed that residual past service deficits should remain the responsibility of letting authorities, but that contractors should be liable for any additional costs incurred due to the effect of their own decisions on past service liabilities.
Using cap and collar arrangements
Respondents thought that cap and collar arrangements have merit, but acknowledge that agreeing the cap and collar levels can be complex.
Almost 75% of respondents suggested that pass-through and cap and collar should be optional and not mandatory. Most respondents thought that these arrangements should be dealt with through contract arrangements rather than through the admission agreement, essentially to ensure that any risk sharing is a matter for the letting authority and the contractor rather than the Fund.
Using open admission agreements
Almost 80% of respondents did not agree with introducing a mandatory requirement to provide open admission agreements, citing uncertainty of pension cost. The majority considered that the current position of contractors deciding whether to offer open or closed admission agreements should remain.
DCLG has stated that it intends to work alongside stakeholders to develop substantive guidance that reflects the key issues raised by the consultation and to develop final proposals for submission to Ministers.
The results of the consultation were largely unsurprising, with contractors and letting authorities understandably adopting different positions. In the meantime the pension aspects of public to private outsourcing exercises are likely to continue to take up a large amount of negotiation time.
DCLG's intention to develop further substantive guidance is welcomed, however, given the time taken to produce the consultation report it seems unlikely that it will be available in the short term or that it will be far reaching. DCLG have also not stated whether the guidance will be statutory or authoritative.