Pensions issues when transferring out staff

Transcription

1 Pensions issues when transferring out staff This is a brief summary of what a scheme employer must consider when looking to outsource a function which includes a TUPE transfer of staff. There is an obligation placed upon all employers to ensure that current Local Government Pension Scheme members retain the right to continue to pay into the scheme, and eligible members retain the right to join. This is done by an admission agreement whereby the new contractor becomes an admitted body (a type of scheme employer ). Party to the agreement must be (1) the administering authority (Leicestershire County Council) (2) the new contractor (as mentioned above) and (3) the scheme employer looking to outsource the contract. Typically the new contractor will need to know what obligations and responsibilities are placed upon them when they become an admitted body. They must know this before they tender as this can have significant costs and implications for them. Firstly will be the level of employer pension contributions they will be required to pay, and this will depend on the demographic of the transferring members and the number, but certainly anything in the region of 23% plus of payroll can be expected. Secondly, may be the requirement for one kind of bond to be in place. This first bond figure will be calculated to assess the risks attached to any potential early payment of pension being made. To give an example, a new contractor becomes an admitted body and part way through the contract gets into financial difficulties and goes out of business. This could entail the staff being made redundant and as such anyone aged over 55 at that time would get their pension put into payment immediately. This would be a scenario that would not be catered for, under normal fund valuations which sets the employer rates, and thus any early payment under these circumstances results in an unexpected early payment and thus a financial strain is placed upon the Fund and must be paid for by the admitted body (employer). The normal course of events is that any early retirements initiated by an employer are paid for by them. However, in this scenario we have established they are in no position to pay as they are insolvent. The money is still owing to the fund and this is the level of risk that needs to be established and indemnified against. So a figure of worst case scenario needs to be calculated and this level of protection must be in place by taking out a bond (a form of insurance) with a bank. Finally, another form of protection must be taken out. This is connected with fund deficits.

2 At the end of any contract (which terminates an admission agreement) the sub fund connected to the admission body is evaluated and if it is established that at that time the fund is in deficit i.e. the liabilities are greater than the assets, then the admission body is liable for making good the shortfall. The Pension Fund will insist on a guarantor being in place again to ensure that money could be paid in the event of default by the admission body, so once again it is possible to guard against this eventuality by taking out a bond with a bank or insurer. This figure will need to be assessed by the Fund Actuary at the outset. Under the scheme rules the ultimate guarantor will always be the scheme employer who outsources, but the policy of the Leicestershire County Council is to require a guarantee in the form of a bond to be taken out with an appropriate institution normally a bank. This will also act as a form of protection to both the Pension Fund and the outsourcing employer. Overall, there will also be Actuarial costs associated with outsourcing as there is a bit of work to be done to evaluate the risks to the Fund, a conservative estimate of around 3,000 should be factored in for this work, which would be paid for by the outsourcing employer. Any such work would not be commissioned without the authorisation to go ahead by the outsourcing employer though. The above may appear to be onerous but the intention and moral obligation is to protect the Fund and its scheme employers from liabilities that have been built up with no employer or sufficient assets remaining to meet those liabilities. It is also vital that all parties are fully aware of the costs and implications of the actions. The only outsourcing employers who are able to enter into admission agreements without an external guarantor being in place are tax raising bodies (Councils)or Academies who must guarantee any shortfall to the fund. Special Note for Academies: I should point out that in the case of an Academy wishing to outsource a function and/or set up a company, to enable an admission agreement to go ahead without an external guarantor they will need to demonstrate that they do have in place the necessary Secretary of State approval (to give a guarantee) that we understand is required. An Academy and the Secretary of State may wish to know what the level of guarantee is and this will be dependent on the size and demographic of any transferring staff. This would need to be referred to the Fund Actuary and would incur costs. If either the Secretary of State refuses permission or the academy itself wishes to have an external guarantor, this would still be possible. It should be pointed out that the existence of a guarantor does not mean that costs, should they arise, will automatically default to them. This would only apply in the event that the company/new contractor itself was unable to pay any outstanding liabilities. An academy will also need to satisfy itself to what extent the Secretary of State is guaranteeing Note: the Secretary of State seems unwilling to act as guarantor for academies so far.

3 To give an example: An academy creates a new company and this company subsequently fails and closes. At this point there could be liabilities which are outstanding to the Pension Fund, which need to be paid. As the company has failed there will be no monies payable by them, so this is when the Pension Fund would rely on the guarantor. You would need to be clear about whether the Secretary of State is acting as the guarantor or simply allowing you to be a guarantor. If it is the latter then the liability would fall upon the academy. If the academy was unable to pay and had also failed then the funding guarantee from the DoE should then be invoked. As a further safety net it would be possible to ask an external guarantor (such as a bank) to act as the guarantor, so if that was in place and a company did fail, then the liability would fall to the bank at not the academy. This would come at a cost though as an annual premium would need to be paid to the bank, similar to an insurance premium. Special note for Leicestershire County Council Local Authority Schools outsourcing contracts: Local Authority schools in Leicestershire should be aware that the County Council has decided that they will not act as the guarantor should local authority schools outsource any contracts, the most common ones being catering, grounds work or cleaning. Schools will therefore need to secure full bond cover before any transfer can take place. This places them in much the same position as academies, where the Secretary of State seems unwilling to act as guarantor in place of the local authority, and they too need to secure full bond cover. As an appendix I have copied below a previous paper which was produced by Colin Pratt the Investment Manager, much of which which refers to the above but it also explains in a little more detail what contributory factors there may be that can result in a deficit. Ian Howe Pension Manager Ian.Howe@leics.gov.uk Admitted Body Status and Need for a Guarantor Appendix A The Local Government Pension Scheme (LGPS) is a multi-employer scheme, but each employer has its own pot of assets and liabilities. The assets are invested as one block, with each employer receiving its share of the investment returns.

4 In the event of an employer ceasing to exist and there being no-one else to take over their asset/liability position, their sub-fund becomes divorced (i.e. there is no employer that is responsible for it); in this case the net asset/liability becomes the responsibility of every other employer in the Fund, on a pro-rata basis. This is the case even if the other employers have never had any relationship with the divorced employer. The Administering Authority has a moral responsibility to minimise, as far as is practical, the probability of divorced assets and liabilities existing as they form a risk to every employing body. It is for this reason that the Administering Authority s policy is to only allow admission body status if there is a guarantor that is a tax-raising body or Academy. If a tax-raising body/academy seeks to outsource work, the new employer can have an admission agreement as long as the tax-raising body/academy is willing to be party to it. In effect, the tax-raising body/academy acts as a guarantor that if the admitted body can not pay for its part of the Fund the impact will be met by the outsourcing body. The guarantee will only become valid if the admitted body ceased to exist (if they went into liquidation, for example) and the Fund will attempt all possible ways of receiving any deficit from the admitted body first. Admitted Body Status from the point of view of a potential contractor/the new company If a contractor who wins a contract or a new company becomes an admitted body, all liabilities for the staff being transferred under TUPE will be transferred to its new sub-fund. An equal amount of assets will be transferred, so there is no deficit on commencement and it is often considered that there is no liability taken on. Whilst this is true that no NET liability is taken on, it is important that the risks are understood. There are numerous scenarios under which a new admission body might encounter issues around funding levels and the build up of a deficit, almost all of which they will have no control over. Some of these would be as follows: i) Staff are transferred across and at the point of transfer liabilities and an equal value of assets are allocated to the new sub-fund. Asset values then fall. ii) Staff are transferred across and gilt yields fall. As gilt yields are a key determinant of the discount rate used to give a present value to liabilities that will be paid in the future, and the level of the discount rate is key to the value of the liabilities. A fall in the discount rate increases liabilities, and a deficit appears. iii) Inflation is higher than allowed for and the value of future pension payments increases. The liability value increases. iv) Pay rises are higher than has been allowed for, so liabilities increase. As the transferred staff have existing service within the scheme and as the LGPS is a defined benefit scheme where final salary is often the determinant of the pension paid this can lead to a significant increase in liabilities.

5 v) Investment returns are lower, in the medium-to-long-term, than has been allowed for. The employer has to pay for more of the benefit than was anticipated. (In reality it is the real investment returns after allowing for inflation that is more important). There are many other scenarios where things can go badly from an employer s perspective, and it should be noted that these risks cut both ways. Things might be positive and a surplus might appear, in which case employer s contribution rates might be able to be reduced in the future. A new employer needs to understand the risks and decide whether they are worth taking. Admitted Body Status from the point of view of an outsourcing authority For a contract to be outsourced it is assumed that the current employer still wants/needs the service but believes it is better delivered by a third party. Staff transferring from one employer to another doesn t create any additional liability it merely transfers future movements and risks to a third party. If the staff remain employed at the outsourcing authority (and assuming the new employer doesn t award higher pay rises than would have been given at the outsourcing employer), these exact changes in liabilities would occur anyway. With small-scale outsourcings in particular it is unwise and short-sighted to assume that the potential contractors understand the risks, and it is worthwhile verifying that this is the case. It is no-ones best interests to rely on the naivety of a potential contractor, if this naivety ultimately impacts onto the delivery of service because costs have increased to levels that are unaffordable. The answer? There is no best way of dealing with the issues. Options involving risk-sharing between the two parties (covered in a contractual agreement that is outside the Admission Agreement) have been used previously for example the outsourcing authority agreeing to take responsibility for any deficit within the Pension Fund at the termination of the contract, assuming the contractor pays a certain level of contribution. In conclusion, it is therefore important that both parties have understood the risks involved so that there are no nasty surprises during, or at the end of, the contract term. Colin Pratt Investments Manager Leicestershire County Council colin.pratt@leics.gov.uk

6 Updated January 2014 July 2015 CE Haywood