Government plans to use the consumer prices index (CPI) instead of the retail prices index (RPI) for the price indexation of public sector pensions have created uncertainty for public-to-private outsourcing exercises.
The Government Actuary's Department (GAD) has confirmed that it will not issue bulk transfer terms or start new broad comparability testing until the issues arising from the CPI changes have been worked through. This stance could have serious practical implications for many public-to-private outsourcing exercises involving the transfer of staff.
On compulsory transfers of employment from the public sector, broadly speaking, the Government's policy is to provide a level of protection for future pension provision - the so called "Fair Deal".
Employees either transfer to the new employer's scheme or remain within their existing public service pension scheme. If they transfer, employees have the option to request that the benefits they have already built up in the public service pension scheme be transferred to the new employer's pension arrangement by way of a "bulk transfer".
Until the details of how the Government will implement the RPI / CPI changes (which are likely to reduce transfer values), the parties to any outsourcing project involving a bulk transfer should consider the likely impact of the changes with their advisers and each other.
What does GAD's announcement mean for situations where bulk transfer terms have been agreed?
For certain public service schemes (e.g. the NHS Pension Scheme), GAD sets the bulk transfer terms. In most cases, GAD also determines whether the pension arrangements into which the bulk transfer will be paid offer "broadly comparable" benefits.
GAD has given no official indication of when it is likely to resume issuing bulk transfer terms or start new broad comparability testing.
Where a contract award is imminent and bulk transfer terms have been offered and accepted, these will be honoured based on RPI equivalence.
In essence, GAD will consider pension arrangements on a case-by-case basis with the relevant public service schemes and awarding department in the short term. GAD is likely to require any submissions to it to discuss in detail how CPI issues will be dealt with.
What does GAD's announcement mean for situations where bulk transfer terms have not been agreed?
Parties will need to discuss the issues and may need to consider postponing the transfer until there is greater clarity from GAD about how the changes will work in practice and, in particular, what bulk transfer terms are offered. If proposed bulk transfer terms are unknown, service providers cannot accurately quantify the pensions cost associated with a bid.
Where any bulk transfer is being contemplated in connection with any outsourcing projects, the parties should at the earliest opportunity engage in open and constructive dialogue with each other and their professional advisers about the likely impact of the change to CPI, and the implications of GAD's position for the project.
Early discussions will enable informed decisions to be made about the change to CPI and allow any potential price and timing issues to be dealt with before the outsourcing process is too far underway.