Admitted Body Status - where are we now?

Why have new guidance?

Introduced in 1999, the Admitted Body Status (ABS) provisions have allowed members of the Local Government Pension Scheme (LGPS) to continue to accumulate benefits under that scheme when their jobs are transferred to an outside contractor. For some time Communities and Local Government (CLG) has been working closely with key stakeholders to resolve perceived problems with the ABS provisions, culminating in a consultation exercise with interested parties (the Consultation). Please see our alert LGPS: More consultation on admitted body status for further details of the Consultation.

Industry concerns primarily related to the cost implications involved in contractors providing transferring staff with continued access to the LGPS. CLG has recognised that transparency of cost is essential in considering the future of ABS. The Confederation of British Industry (CBI) also called for better guidance for those involved in public procurement on evaluating pension aspects of bids to achieve genuine like-for-like comparisons of pension costs and to tackle poor understanding of pension costs, risks and consequences for the private sector^[1].

The Consultation suggested three possible approaches:

• providing revised guidance, but retaining the current framework
• providing revised guidance, but considering making minor regulatory modifications to make the existing framework work better (for example, by introducing provisions to refund any pensions surplus at the end of a contract)
• introducing broader regulatory changes to enhance the options available, for example, allowing for pass-through of pension costs so that contractors would contribute only for membership accrued during the contract.

Our alert, Staff transfers from the Local Government Pension Scheme (LGPS) - results of the Admitted Body Status consultation, discusses the results of the Consultation.

Status of the guidance

CLG has adopted the first of its three options - to provide revised guidance. The guidance is authoritative but not statutory. It retains the flexibility for letting authorities to negotiate an approach to risk management with contractors that can take into account local circumstances and deal specific issues. It should assist in developing a better understanding of the ABS framework and ensure that all bidding parties have a similar appreciation of pension arrangements during the negotiation of outsourcing exercises.

But as the guidance is not statutory, there are no sanctions if it is not followed. That said, the statutory obligation placed on letting authorities to ensure that outsourcing contracts provide transferring employees with rights to acquire pension benefits that are the same as, broadly comparable to, or better than those that they had before the transfer (under the Best Value Authorities Staff Transfers (Pensions) Direction 2007), means that the guidance will need to be followed by contractors to secure the best chance of their bid being successful.

What the guidance says

The guidance outlines how to handle workforce matters in contracting and briefly addresses two tier workforce issues and, as the title suggests, its main focus is on providing advice on the ABS provisions.

Usefully for contractors, where ABS is sought, the guidance sets out:

• that it is the contractor's choice between ABS and the provision of a broadly comparable scheme
• the differences between 'open' and 'closed' admission agreements
• when a bond or indemnity may be required and reviewed
• when admission agreements should be dated and the notification requirements upon entering into one
• action to be taken before termination of an admission agreement
• how LGPS contribution rates are set and reviewed (including the information the actuary needs about transferring staff)
• details of the policy statements that contractors need to prepare showing the basis on which they would make decisions on various discretions (some discretions are required by law to be included in the statements, others are recommended).

What the guidance does not cover

The main regulatory provisions relating to what must be included in admission agreements (as required by the Local Government Pension Scheme (Administration) Regulations 2008) are set out at the end of the guidance. However, the guidance does not, as some respondents to the consultation suggested it should, consolidate the associated Fair Deal guidance setting out the safeguards for employees' pension arrangements^[2], the Two-Tier Code aimed at preventing terms and conditions inequality between staff working side by side on public sector work^[3] and the 2007 Direction (referred to above) in one place. Nor does it set out a standard template for admission agreements.

The guidance does not address secondary and onward transfers in detail. It only partially answers the CBI's desire for better guidance that emphasises the need to avoid subjecting contractors to risks outside their control.

Risk sharing

The guidance recognises that potential risks associated with the provision of pensions (such as change in pay and conditions of service, mortality assumptions, stock market performance and ill health retirement assumptions) can cause uncertainty and confusion among local authorities and contractors.

The guidance stops short of setting out a standardised approach to risk sharing that places risk where it can be most effectively managed and, where possible, controlled. Instead, it recommends that the letting authority and the contractor discuss with the relevant administering authority and its actuary, the best way to manage potential risks, favouring flexible arrangements which give freedom to negotiate arrangements that suit individual contracts.

This reflects the outcome of the consultation that suggested risk sharing mechanisms like "pass through" should be dealt with through contract arrangements rather than through admission agreements, thereby taking them outside of the scope of the guidance. Usefully, the guidance does set out the consensus among respondents of those risks that should be retained by letting authorities and those that should be transferred to contractors.

What local authorities and contractors need to do now

Pensions need to be considered early in the bidding process and discussed openly between the parties. Both the letting authority and the contractor will need to assess the financial risks of entering into any admission agreement.

The guidance does go some way towards clarifying the roles of each party in the contracting process. While it would have been helpful had the guidance addressed the question of risk sharing between the local authority and the contractor, it is likely that broader regulatory change would have been required to do this.

The future of ABS?

The lack of broader regulatory change accompanying the guidance means that items such as risk sharing mechanisms still need to be dealt with as part of contract negotiations, despite calls from the CBI that making such mechanisms mandatory (or a default option) could help to standardise approaches, simplify contract negotiations and reduce costs.

There will inevitably be more direction and regulation. For example, CLG

• has stated that it proposes to ask practitioners about a range of issues regarding the regulatory framework to see if improvements are needed to the ABS provisions
• has indicated that it will look at whether or not the regulations are sufficiently flexible to deal with scheme employers in the event of mergers or, in more extreme situations, in the event of employers going into administration
• considers it might be helpful to provide that a period of employment prior to formal admission can be counted as membership of the LGPS (there being sometimes a delay in ABS being obtained)
• suggests that the provision in existing regulations which requires any question regarding the construction of an agreement to be referred to the Secretary of State for determination should be removed on the basis that it would be very unusual for the parties to an admission agreement to actually so refer any such question.

All this is good news - CLG is keeping an eye on what does and doesn't work and is listening to practitioners and those in the industry with most exposure to the ABS provisions. Further work will be necessary and ultimately some tough decisions will be required.

Footnotes

[1] See the CBI report dated June 2009 entitled 'Reforming pensions practice in public services contracting'
[2] Staff Transfers in the Public Sector (Cabinet Office Statement of Practice, January 2000 (revised November 2007) and A Fair Deal for Staff Pensions: Procurement Of Bulk Transfer Agreements and Related Issues (Guidance Note by HM Treasury, June 2004)
[3] Two-Tier Code: Circular 03/2005 Code of Practice On Workforce Matters in Local Authority Service Contracts