ITEM PF17
PENSION FUND COMMITTEE – 21 FEBRUARY 2008
ADMISSION AGREEMENTS
Report by Assistant Chief Executive & Chief Finance Officer
Introduction
1. In December a report was submitted regarding three potential admission agreements with Oxfordshire Pension Fund and asking for the Assistant Head of Finance (Shared Services) to be given delegated powers to finalise these agreements. This report updates members of the current status of these applications.
2. On 18 December Department of Communities and Local Government (DCLG) issued a consultation paper to review the Admitted Body Status (ABS) provisions for private sector contractors – transferee admission bodies. The date for making comment to CLG is 10 April 2008.
Previous Applications
3. QTASS, this application is being progressed by the Assistant Head of Finance (Shared Services).
4. Negotiations are continuing regarding the enlarged group structure of A2/Dominion Housing. However, we have been advised that for the present there will be no changes affecting Cherwell Housing, although this matter will be subject to future periodic review.
5. Following negotiations between Sanctuary Housing Group and Banbury Homes (an admitted body) it has been agreed that a novation to the current admission agreement (thereby allowing Sanctuary to step into Banbury Homes role as scheme employer) is the simplest way forward. Paperwork is currently being prepared.
Consultation for Transferee Admission Bodies
6. The consultation arises from discussions between CLG and their established advisory group of key stakeholders to consider new approaches for ensuring that the ABS provisions meet the needs and supports the interests of local authorities, contractors, employees and taxpayers.
7. CLG have set out three over-riding principles for any future reform or development of the current arrangements. These are:
(a) Delivery of Government policy on best value including outsourcing and transfer of undertakings; (b) Meeting government policy on proper safeguards for employees as regards pension arrangements as set out in the Fair Deal for Staff; (c) That any proposals to achieve these are affordable, sustainable and continue to have no adverse impact on local authority costs or council tax.
8. The first proposal is to provide revised guidance re-emphasising the original intentions whereby contractors should pay contributions based on the future service cost and would not inherit past service liabilities.
9. Contractors’ pension contributions would be assessed on the basis of being fully funded at the point of transfer. However, their contribution rate would vary to take account of any gains or losses during the period of the contract.
10. These, current, arrangements are generally regarded as sound and protective of taxpayers interests. Although contractors have concerns that these arrangements are not always implemented as originally envisaged.
11. The second proposal is to make some minor regulatory changes to the existing regulations to focus on particular areas where the implementation has moved away from the original intentions. Some specific examples listed below are:
(a) A specific provision to refund any pensions surplus at the end of a contract to remove asymmetric risk and so enabling contractors to benefit from fund performance and actuarial assumptions; (b) Requiring annual actuarial monitoring of contracts to check for employee related or other changes that could have an impact on the pensions position; (c) Requiring an annual review of the indemnity cover; (d) Requiring the prepared risk assessment to be published locally; and (e) Requiring contracting/letting authorities to provide a statement, as part of the bidding process, about the actuarial aspects of ABS, for example, to replicate paragraph 42 of the Department’s (revised) 2003 guidance.
12. The third proposal is to consider the introduction of some broader changes to enhance the options available whilst avoiding conflict with the key policy basis of ABS. Within this option there are three provisions which could be considered.
Pass Through Arrangement
13. A pass through arrangement suggested by contractor representatives during informal discussion stages that pension risks could be shared between the letting authority and contractor or indeed removed from the contracting process altogether.
14. With pass-through, the intention would continue to be that contractors would contribute only for membership accrued during the contract and would have no past service liabilities (other than to the extent that some factors, such as higher than expected pay rises, impact on the cost of past service) nor ongoing liability at the end of the contract.
15. The letting authority would retain and meet the actual cost of all the investment risk and essentially meet the actual cost of pensions rather than have to meet the cost of a contract inflated either by over-cautious risk assumptions or by the price of contractor failure in terms of quality delivery or financial performance. The contractor would pay contributions but any excess above the rate specified at the outset of the contracting process, adjusted to take account of subsequent variations only for specified factors (those within the contractor’s control), would be reimbursed through the contract.
16. The precise apportionment of costs and risks between the contractor and letting authority is an area which will require close attention, particularly where a public sector pension scheme is involved. Costs additional to the specified contribution rate to be borne by contractors would be those within the contractor’s control; e.g. the value of all liabilities arising from changes in pensionable pay, levels of early retirements or the exercise of employer discretions which exceed those based on the specified actuarial assumptions.
17. The benefits, it is argued, of introducing pass-through arrangements include providing added certainty amongst contractors and letting authorities. In effect, it would allow contractors to concentrate properly on service delivery rather than pension risk. Contractors put off by pension issues might enter the market, particularly smaller companies. Better value for money may arise as no pension premium payable by local authorities would be involved. It is argued that if much or all of the pension risks were retained by local authorities, the result might be greater competition, realistic prices and better value for money to the public sector. It also creates a level playing field with in-house bids.
18. However, the potential disadvantages of pass-through arrangements include a markedly higher level of risk being retained by the public sector/taxpayers, an economic distortion of the contract letting process, creating added complications to the bid-process and for authorities when managing pension risks within and around the contract.
19. It should also be noted that full pass-through of pension costs would represent a significant change from the current arrangements, and some would argue that effectively removing pension risk from contractors runs counter to the philosophy of risk transfer currently inherent in the contracting out of local authority services.
20. Consider the scope to explore whether it is lawful or desirable to require contractors to adopt mandatory open admission agreements as a standard for all outsourcing and contract re-tenders when ABS is the contractor’s preferred route of providing pension provision for transferring local authority employees.
Open Admission Agreements
21. It has been suggested by employee representatives during informal discussion stages of this review that contactors should be required to sign up to open admission agreements when delivering services or functions outsourced by local authorities when ABS is the contractor’s preferred route for providing pension rights for transferring local authority employees. This means that all new employees on a relevant contract can also become members of the LGPS, in contrast to closed agreements where only members of staff who originally transferred with the contract can be members of the LGPS.
22. The benefits, it has been argued, of introducing a mandatory requirement to provide open admission agreements would address multi-tier workforce issues and ensure that contractors could not bid for contracts on the basis of an ability to spend less on pension provision for new starters. It has been suggested that the provision of open contracts would reduce the likelihood of contractors wishing to replace transferred staff with new joiners at the first available opportunity and support the premise of cost savings from outsourcing not being at the expense of the workforce.
23. However, it may be argued that TUPE applies to all staff transferred under Best Value and protects employees during the life of an outsourced contract. Furthermore, it could be suggested that requiring contractors to provide open admission agreements for employees working on outsourced local authority contracts could have a detrimental effect on transferring employees. Some contractors who may have ordinarily considered a closed admission agreement and enable transferring employees to have continued access to the LGPS may instead choose to provide access to their own or an alternative pension scheme. Note: by virtue of directions issued under section 101 of the Local Government Act 2003, contracting authorities are required to ensure the pension rights for their transferring staff are the same as, broadly comparable to, or better than, those rights received as an employee of the authority.
Cap and Collar Arrangements
24. Another approach could involve including contractual changes, such as cap and collar arrangements, which some authorities already insert as clauses in their contracts.
25. Cap and collar arrangements work by specifying in the contract an upper and lower limit on the pension contribution rate. The contractor pays the contribution rate certified by the actuary. But, where the actuary specifies a contribution rate outside the range between the upper and lower limits, there is an adjustment in the contract price. The contracting authority meets the cost in excess of the agreed maximum, but the contractor does not get the benefit of contributions falling below the lower limit. Such arrangements form part of the contract between the contracting authority and the contractor; they are not part of the admission agreement and do not involve administering authorities when introduced.
26. Cap and collar arrangements are normally specified at preferred bidder stage, though greater transparency and a more even playing field would suggest that, if such arrangements may be on offer, this should be made clear at the outset in the invitation to tender.
27. It has been claimed that cap and collar arrangements may provide added certainty and would largely address some practical problems. On the other hand, there are potential disadvantages in that contractors might always price near the cap for safety, and authorities never benefit from the collar; and it needs separate negotiation in each contract, incurring unproductive costs.
28. The issues summarised above are for consideration and analysis at this stage. It is for interested parties to assess the significance of all these factors so the department can consider the responses and determine a satisfactory way forward.
RECOMMENDATION
29. The Committee is RECOMMENDED to
(a) note the report in respect of the applications;
(b) make comments on the content of the Admission Body Status Consultation; and
(c) delegate to the Assistant Head of Finance (Shared Services) the responsibility to make a response, on behalf of the Oxfordshire Pension Fund, to the consultation including the comments made at b) above, once full consideration has been given to the cost implications within the consultation paper.
SUE SCANE Assistant Chief Executive & Chief Finance Officer Corporate Core
Background papers: Review of Admitted Body Status
Contact Officer: Sally Fox, Pension Services Manager Tel: (01865) 797111
February 2008
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