LGPS pensions on outsourcing

Published by Mark Norquay on

The Admitted Body framework applies in relation to the Local Government Pension Scheme (LGPS), enabling contractors to choose between participating directly in the LGPS or setting up a ‘broadly comparable’ scheme.

Authorities letting out a contract have a statutory obligation under the Best Value Authorities Staff Transfers (Pensions) Direction 2007 to ensure that transferring employees are provided with rights to acquire pension benefits that are the same as, broadly comparable to, or better than those that they had before the transfer.  Guidance issued by the Department for Communities and Local Government (DCLG) provides guidelines on how this should be achieved, namely through the Admitted Body framework.

"The most critical issue is the possibility of deficits arising over the period of the contract."

Admitted Body Status allows an employer taking part in private sector outsourcing from government departments to participate in the LGPS with respect to the transferred employees for the duration of the contract.  The employer must apply to participate in the LGPS and enter into a legally binding Admission Agreement and at this point they become an Admitted Body.

These employers will pay contributions to the LGPS in respect of the transferred employees (i.e. essentially the contributions the government would have paid) and the employees are able to continue to accrue benefits in the LGPS.  At the end of the contract, differences between the actual and expected experience in relation to the value of members’ benefits (for example due to larger salary increases, or a decrease in future expected investment returns), then the contractor may be required to pay an additional contribution to meet the additional benefit cost.

The most critical issue is the possibility of deficits arising over the period of the contract.  If the employer becomes an Admitted Body, this will apply to all transferred employees who are members of the LGPS.  If the employer makes use of a ‘broadly comparable’ scheme instead, then the issue of deficits on past service benefits will apply only in relation to employees who choose to transfer their past benefits to the broadly comparable scheme (an option which must be offered).  However, deficits can still arise in relation to the current benefits accruing for all employees.

The other key difference between the Admitted Body framework and new Fair Deal is that the use of a ‘broadly comparable’ scheme under the Admitted Body framework is a freely available option, whereas under new Fair Deal these are only to be accepted in exceptional circumstances.

Admission Agreements typically include a side letter to record agreements between the contractor and the Letting Authority which, although contractually binding, are separate from the Admission Agreement itself.  This may include a waiver of any deficit at the end of the contract, or of any increases in contribution requirements during the contract.

It is important that any agreements set out within the side letter are very clearly explained, as it is common for disputes to arise over the exact meaning of the agreements when it eventually comes to implementing them at the end of a contract.

If you represent an employer who is, or could be, involved in an Admission Agreement and would like to discuss the relevant issues then please contact us.

More information

If you would like to know more then please visit the Outsourcing area of our website