Briefing Paper: Local Government Pensions in a Cost Share Group Company

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1 Briefing Paper: Local Government Pensions in a Cost Share Group Company Introduction This briefing paper outlines how Wessex Education Shared Services (WESS) identified and overcame a number of challenges around the preservation of employee membership in the Local Government Pension Scheme (LGPS) on transfer into the shared services company. The paper is not intended to be a substitute for expert legal advice but will, it is hoped, help other projects, especially those operating as cost sharing group entities, to move more quickly towards identifying and resolving similar issues. WESS would like to acknowledge with gratitude the expert advice and guidance provided by Rebecca Cooke of Wrigleys LLP throughout the pensions journey. Background - About WESS WESS is the product of a project undertaken by the Wessex Colleges Partnership during with support from the Skills Funding Agency and the Association of Colleges (AoC) WESS is a private Company Limited by Guarantee; it is owned in equal proportion by its Member colleges of which it is an associate company (importantly, WESS is not an arms-length subsidiary of its Member colleges) Each College Principal is a Director of the Company WESS is established as a Cost Share Group (CSG) as detailed in HMRC Briefing in order to benefit from the VAT exemption introduced in the Finance Act 2012 WESS provides business support services, at cost, to its Members across a range of areas including finance, HR, payroll, student records, MIS, examinations, procurement and software systems development The first WESS employees were transferred from their former College employment under a Transfer of Undertakings/Protection of Employment (TUPE) process in summer 2013 WESS operations span several county boundaries (Dorset, Hampshire, and potentially Somerset) and employees are in different LGPS Funds. Context At the outset it should be noted that the WESS Cost Sharing Group arrangement does not come within the "Fair Deal" principles (see for information), so the options open to the project team as to what pension provision would be available to transferring employees were wide. 1

2 However, it was agreed by the Principals Steering Group early in the planning for the shared services joint venture that every effort would be made to enable transferring employees to continue their membership in a defined benefit pension scheme. This decision was taken in order to improve the retention of knowledge and expertise, avoid disadvantaging transferring employees compared to others remaining in the direct employment of the colleges, and to help ensure the continuity of the services that were to be relocated from the individual colleges. Business support services employees in the Colleges were, in the main, members of the LGPS. As noted above, the project spanned several county boundaries (Dorset, Hampshire, and Somerset) and, accordingly, several LGPS Funds. LGPS Funds are independent entities. They set their own employer contribution rates (whereas employee rates are standardised nationally) and may be structured in different ways (e.g. in the Hampshire LGPS Fund the FE Colleges are pooled with a single employer contribution rate set for the whole pool; meanwhile in the Dorset Fund contribution rates are set by the appointed actuary based on the calculated deficit for each body). A key concern that the project group was mindful of throughout the planning and consultation for creation of the company was the risk that precedents might be set that could subsequently hamper other partnerships and projects. Working with the LGPS Funds A dialogue was begun between solicitors acting for the Wessex Colleges Partnership (Wrigleys LLP) and those acting for the Pension Funds in Hampshire, Dorset and Somerset in the summer of 2012 when the project entered its implementation phase. A range of questions were posed and were progressively worked through by the legal teams over the course of the following twelve months. 1. Can WESS be an employer in the LGPS? It was readily established that the proposed ownership and control by the colleges of the planned shared services company would automatically enable WESS to be an employer in the relevant LGPS Fund(s). Colleges are listed in Schedule 2 Part 1 of the LGPS Regulations. Entities controlled by Part 1 bodies are listed under Part Which Administering Fund, or more than one Fund? Because WESS operations may cross three different LGPS Fund administrative areas, a question naturally arose as to whether WESS could deal with a single fund (preferable from a payroll administration perspective) or would have to deal with two or more funds (increasing the potential administrative burden). Given the location of WESS Head Office, Dorset might logically be interpreted as the appropriate administering fund (which would reflect, in part, the way admitted bodies are treated in the LGPS). However, it was eventually concluded that WESS would continue to deal with the current three LGPS Funds for the following reasons: Paragraph 1 of Part 1 of Schedule 4 of the Administration Regulations provides that "the appropriate fund for a member is the fund specified in column 2 of the following Table for a member of his description". According to paragraph 5 of the Table in Schedule 4, the appropriate fund in column 2 of the Table for "an employee of a company under the control of a Scheme employer specified in 2

3 Schedule 2" (e.g. an employee of the New Company) is "the Fund which is the appropriate fund for employees of that Scheme employer". This is subject to paragraph 2 of Part 1 of Schedule 4 which provides that the Secretary of State may direct which fund is the appropriate fund for members falling under paragraph 5. So, although it was possible for WESS to apply directly to the Secretary of State for a Direction as to which Fund should administer its scheme, WESS recognised potential advantages to enabling employees already in the Hampshire Fund to remain within the FE colleges pool (described above) operated by this fund. While the funds debated the implications of one acquiring the other s employees (and liabilities), employees going through consultation around the proposed TUPE transfer were understandably nervous about what implications there may be if their pension fund were to change. 3. Is WESS an outsourcing arrangement? As highlighted at the beginning of this note, it should be recognised that the Cost Sharing Group proposals did not fall within Fair Deal. However, this question arose because each of the LGPS Funds had previous experience, notably in the local authority sector, dealing with circumstances in which employees had been transferred out of public sector employment into private sector outsource entities (most commonly arms-length subsidiaries or larger service providers). Inevitably the Funds looked to these previous experiences for precedents in their treatment of WESS and found that there was an increased risk that such employers would withdraw from the LGPS thereby creating difficulties for the fund in relation to liabilities. The argument was made by WESS that a Cost Sharing Group, a new type of entity that was introduced in the Finance Act of July 2012, should be treated as a very special case given its direct ownership and control by the colleges. WESS believes that there remains a disconnect between the expectations of Her Majesty s Revenue and Customs (HMRC) for operational control of a VAT-exempt CSG and the evaluation of risk by Funds and their actuaries in relation to such entities. Cost Sharing Groups are not free, independent commercial entities. 4. Is a Parent Guarantee Required? There is no legislative requirement for WESS to be backed by a parent organisation guarantee. This question emerged initially as a subset of the previous question (as a way for the funds to protect themselves from the perceived risk by retaining a direct relationship with the former employing colleges) but led to a somewhat protracted debate between the lawyers. The nub of the issue from WESS s perspective was what the scope of any guarantee ought to be given that employees would be transferring from more than one college into WESS. It would be inappropriate, if not impossible, for any college to find itself individually or even severally liable, for an undefined timespan, for all of the debts in the fund(s) for all of WESS s employees. Parent Guarantees are typically arranged where an organisation becomes a member of the LGPS through what is called an Admission Body agreement. Common examples of admission bodies are found in public sector outsourcing where a company may, at some stage in its history, have been in the control of a local authority but subsequently became an independent entity. But such 3

4 guarantees are not commonly demanded where the organisation is a designated body like WESS (see question 1). From a practical perspective it was recognised that the contribution rate is fixed by the respective Fund Actuaries and they can take into account their own perception of the risk attached to any body in the LGPS. Having received indicative actuarial rates for operating without a guarantee, it was established that a parental guarantee would be required in order to make the contributions rates more manageable for WESS. Having established that it would be appropriate to have a parental guarantee the next question to be addressed was who should it cover and what should its scope be. WESS sought advice from the AoC about the potentially unlimited nature of the proposed parent guarantee that the funds initially expected the colleges to provide. The matter was raised by AoC on behalf of the project with the Department of Communities and Local Government (DCLG) Policy Review Group (PRG). Ultimately the guarantee was only deemed workable if WESS operated a semi-closed scheme restricted only to a specific class of employees who had transferred from a college under a TUPE arrangement. As a footnote, there was also some interest from unions about what they perceived to be a loophole in the rules for college subsidiary companies that might enable them to opt-out entirely from the LGPS in order to avoid comparatively high, and uncertain, employer contribution rates compared with similar jobs in other sectors. The early decision to maintain LGPS membership for transferring college employees took the potential heat out of this area. 5. Will Employer Contribution Rates Increase? If the number of members transferring under TUPE from an institution is 10 or more, then the transfer will fall within the bulk transfer provisions in the LGPS Regulations and will be dealt with by the relevant Fund actuaries who will assess new risks and set contribution rates. Most LGPS members of the College still remain in College employment and the transferring employees were only a subset of these. The LGPS triennial review has been on-going concurrently with the creation of WESS, so although the Fund actuaries have already indicated that employer contribution rates will increase from April 2014 it is unknown at present whether, and by what amount, these might vary from the Member College rates. It is also important for any project to understand all of the potential financial risks of being in the LGPS (in addition to the ongoing contributions), in particular the risk of strain payments and/ or exit debts that may arise, for example where, somewhere in the distant future, there are no more active WESS employees in the LGPS. For WESS, it was also essential that these risks were recognised in the Shared Services Framework Agreement with its members since potential debts would include former service in the colleges, not just current service in WESS. LGPS: The Reality in WESS So what were the answers to all of these questions for WESS? 1. WESS is a designated schedule 2 part 2 employer in the LGPS. 4

5 2. WESS has employees in both Dorset and Hampshire funds o As expected this has resulted in some additional administrative burden on the payroll and pensions team and has also necessitated preparation of multiple agreements, guarantees and designations. 3. WESS operates a partially closed LGPS scheme which is only accessible to employees transferred in to WESS under a TUPE process from a college o WESS has designated (via a Designation Resolution made by its Directors) this class of employees as being eligible for membership in the scheme. o This was the only viable option under which the parent guarantee requirements could be agreed and made acceptable to the funds and the colleges. o The implication of this is that, at some point in the future, WESS may cease to have active scheme members (which will be a trigger point for potential Exit Debt payments under the parent guarantee). o A partially closed scheme was not an ideal outcome from the union perspective who would have preferred to see an open scheme accessible all employees. 4. A Guarantee has been provided by the Corporation of each of the Member colleges to back the existing and future debt liabilities for their former employees o It is important to be clear that although an employee may leave college or WESS employment at some point in the future, the debt liability does not necessarily leave with them (the debt only ends through a further TUPE transfer, on the employee s retirement, if the employee themself chooses to transfer their benefits out of the LGPS, or when an exit debt is paid by the relevant employer). 5. WESS offers a defined contribution pension scheme for employees recruited directly to the company or who have opted not to join the LGPS. Lessons Learned The pension s negotiation was complex and it took significant dialogue over an extended period of time to establish a way forward. Consequently it also cost rather more in fees (solicitors and actuaries) than the project had estimated. It is hoped that this briefing note will help to save some time and effort in establishing the options for your project. Some final points: Cost Sharing Groups are new. Neither the Funds nor their Lawyers yet have a clear appreciation of how CSGs are governed and structured. They have no prior experience on which to base their evaluations of risk. Fund Actuaries are likely to take every opportunity to review and revise (upwards) employer contribution rates (even where risk has not obviously changed). Finally: A footnote about the Teachers Pension Scheme One of the managers who transferred to WESS was a member of the Teachers Pension Scheme (TPS). It became apparent early on that, given the specific constitution of the TPS, a change in primary legislation would be necessary for WESS to become a provider in the TPS. Given that such a change could take some years to work through, this route was discounted and the employee given the option to defer membership of the TPS and begin membership in LGPS instead prior to transfer. 5