Outsourcing a service

Scheme Employers in the LGPS considering outsourcing a service or going through a TUPE process should be aware of:

• Direction/legislation for pension protection when staff are TUPE transferred and when these apply.
• Considerations before and during the TUPE exercise.
• Where to find further information on the process and costs in outsourcing a service with LGPS eligible staff. 
• Responsibilities of Scheme Employers, service providers and administering authorities.

When considering outsourcing a service, it is vital that the Avon Pension Fund (APF) is contacted at the earliest opportunity to ensure members’ pensions are protected.

TUPE and how it impacts the LGPS

“TUPE” refers to the ‘Transfer of Undertakings (Protection of Employment) Regulations 2006’. The regulations are designed to protect the employment rights of employees who are affected by a business change; for example, when a business or undertaking is transferred to another employer. This applies to all organisations, regardless of size, that operate within the United Kingdom. 

TUPE falls under employment law and protects employees' rights when they transfer to a new employer, but it does not include pensions. There are Government measures which sit alongside TUPE to ensure that Local Government Pension Scheme (LGPS) pensions are protected. Staff LGPS pensions are usually protected under:

• HM Treasury’s Fair Deal for staff pensions (2013), or
• The Best Value Authorities Staff Transfers (Pensions) Direction (2007) 

These protections apply whether it is a new outsourcing or a re-tender of an existing outsourcing. 

LGPS members pension protection when TUPE transferred

The Scheme Employer should ensure that staff who are either current members of the LGPS, or who have an entitlement to become a member of the LGPS, when transferred under TUPE have access to either:

• Continuing Membership of the LGPS, or
• A Government Actuary Department (GAD) certified Broadly Comparable Pension Scheme.

Continuing Membership is achieved by the contractor entering into an Admission Agreement to become an Admitted Body in the APF. This is a tripartite agreement between the administering authority, the Scheme Employer (guarantor), and the contractor. It is vital that staff are not TUPE transferred to a contractor without the necessary pension protections being in place and, as a matter of principle, staff should not be transferred before the commercial contract has been signed. There may be rare circumstances in which an admission agreement has to be implemented retrospectively but this is far from ideal as it leaves the transferring staff in limbo for the period between the TUPE transfer and the date when the admission agreement is signed. 

Legal basis for LGPS pension protection

The table below is a summary of the applicable pension protections for different types of Scheme Employer:

*Neither Fair Deal nor the 2007 Direction apply to Higher Education organisations, though if outsourcing LGPS eligible staff the Fund should be contacted to ensure any decisions are compliant with the Regulations in relation to first instance decisions made about members pensions (Reg 72/73).

Some employers may not fall under New Fair Deal or Best Value Authorities legislation/ direction but are able to mandate admitted body status as part of a commercial contract, under the Local Government Pension Scheme Regulations. Employers who participate in the LGPS should be aware of the legal position regarding staff TUPE transferring from their organisation to an external service provider (i.e. the contractor) including the applicable responsibilities to ensure pension protection going forward.

Other types of TUPE with LGPS implications

Maintained School converting to an Academy

TUPE applies when a local authority maintained school becomes an Academy as staff will transfer from the local authority to the Academy. The process for academy conversions is covered in the apply to join the LGPS section.

Statutory reorganisations

These include events such as Local Government Reorganisations (e.g. changes of boundaries or functions between tiers of Councils) and other legal changes affecting Scheduled and Designating Bodies (e.g. mergers of colleges or other reorganisations of public sector bodies etc). APF should be made aware of any Statutory Reorganisations at the earliest opportunity and will deal with the pension implications of these on a case-by-case basis.

Ten or more staff transferring out of the Fund

Under LGPS Regulation 103, if 10 or more members are being TUPE transferred from one administering authority to another in a single event, the Fund’s Actuary is required to agree terms with the receiving Fund’s Actuary and calculate the transfer value payable for the accumulated pension assets for the members being transferred. Once calculated and agreed by all parties, the payment will then be made from the previous Fund to the new Fund. This event is usually referred to as a “Bulk Transfer” and there are costs associated with the Actuarial calculations, payable by the Scheme Employer, which the Fund can advise of. Where there are fewer than 10 members transferring, the transfer value is calculated on standard terms.

How an outsourcing is set up in the Fund

Admission (or Admitted) Bodies are organisations which apply to join the LGPS. They are known as admission bodies because they join the Fund by signing an Admission Agreement. The Admission Agreement is a contract between a Scheme Employer, the administering authority of Avon Pension Fund, and the admission body (LGPS Regulation: Schedule 2, Part 3 applies).

Admission bodies fall into two groups: 

• Transferee Admission Body (TAB) – an organisation which is contracting to provide a service where the service is being outsourced by a Scheme Employer. In most cases there will be a transfer of a service by way of a commercial contract. Please see “Prospective Transferee Admission Bodies” in apply to join the LGPS.
• Community Admission Body (CAB) – an organisation which is “not for profit” and has a ‘community interest’ linked to an existing Scheme Employer(s). In most cases there will be a service transfer agreement instead of a commercial contract. Please see “Prospective Community Admission Bodies” in apply to join the LGPS. 

Broadly Comparable Pension Scheme

A Broadly Comparable Pension Scheme can only be offered by a contractor as an alternative to becoming an admission body in the LGPS if the outsourcing falls within The Best Value Authorities Staff Transfers (Pensions) Direction (2007).  

Only in the most exceptional cases are Broadly Comparable Pension Schemes permitted under HM Treasury’s Fair Deal for staff pensions (2013).

A contractor can only offer its own pension scheme to the staff being transferred, if the scheme has a valid Government Actuary’s Department (GAD) certificate to prove it is broadly comparable to the LGPS. If a contractor has a GAD certificate, please contact APF_EmployerAdmissions@bathnes.gov.uk and we will be able to provide further guidance on how to proceed.

Considerations when outsourcing a service

Initial preparations

The Scheme Employer needs to nominate an officer to be responsible for managing the outsourcing exercise and should appreciate that ensuring compliance with pension matters can be complex and time-consuming. As such, it is important that pensions are considered at the earliest opportunity. 

Where a Scheme Employer is under obligation to ensure pensions protection for their transferring employees, the commercial contract must provide for this to be achieved via Continuing Membership of the LGPS (or a Broadly Comparable Pension Scheme, see previous section). The company which is awarded the service contract (i.e. the contractor) in most cases enable transferring employees to have continued membership in the LGPS via an admission agreement.

A company will not be in a position to make an informed bid to provide a service without knowing the costs of ensuring pensions protection via Transferee Admission Body status, so the costs should be included as part of a tender. The Scheme Employer should obtain the pension costs from the APF to include in their tender documents before starting the procurement process.

The process of obtaining pension costs to include in a tender document will involve work by the Fund Actuary after ensuring that transferring LGPS Members’ pension records are up to date. This process usually takes around a month to complete. The APF can also provide guidance on the LGPS pension considerations which both the Scheme Employer and contractor should be aware of on a case-by-case basis.

Pension costs - Employer contributions & fees

The new employer contribution rate for the outsourced service will be calculated by the Fund Actuary (Mercer) who will carry out an actuarial valuation based on the cohort of staff being TUPE transferred. This employer contribution rate is payable from the contract start date when the contractor becomes an admission body in the APF, and is the charge made to an employer to cover the cost of providing the pension scheme benefits provided by the LGPS, after allowing for Member contributions and the expected return on Fund investments.

There is a fee for the actuarial valuation and administration costs which is set out in an “Employer Fees” document in apply to join the LGPS. The APF always invoice the Scheme Employer for these costs, but they can be recovered by the Scheme Employer from the contractor if this is set out in the tender documentation.  

Forms required to set up an outsourcing in Fund

As part of the outsourcing process the APF will require some forms to be completed and returned. 

The forms required are listed in the “Outsourcing a Service” guidance document in the apply to join the LGPS section under the respective admission type (i.e. “Prospective Transferee Admission Body” or “Prospective Community Admission Body”).

Pension clauses for tender and contract

The Scheme Employer must decide if it will retain the Pensions Risk or if this Risk is to be transferred to the contractor.  This means that the employer must decide principally if it wishes to retain any funding deficit (or surplus) which may emerge over the course of the contract or transfer that potential liability (or asset) to the contractor. The responsibility for any contribution increases which arise over the course of the contract must also be addressed. 

The Scheme Employer will also need to decide if a Bond is required to protect it in the event the contractor becomes insolvent with a pension liability it cannot meet. This will only be relevant if the Pensions Risk is transferred to the contractor. The question of whether a Bond is required, together with the Bond level, must be decided at the tendering stage so that the cost of providing a bond can be included in the tender price, or does not need to be included in the tender price. 

Both the sharing of Pensions Risk and determining whether a Bond is required and how much it should be are covered in further detail in pages 10 & 11 of the “Outsourcing a Service” guidance document in apply to join the LGPS. This document also goes through the process of how to achieve admission body status step-by-step. 

Admission Agreement

The successful Contractor can become an Admitted Body in the LGPS (TAB or CAB) by entering into an Admission Agreement with Bath & North East Somerset Council (the Administering Authority of the APF) and the outsourcing Scheme Employer.

The Admission Agreement is a legal document which allows the contractor or service provider to provide Membership of the LGPS to employees TUPE transferring to their organisation. LGPS membership must be continuous where an employer has an obligation to ensure pension protection for TUPE transferring staff. This is one reason why an Admission Agreement should be put in place simultaneously with the commercial contract. It is important that the commercial contract should not commence before it has been signed and the contractor has agreed the pensions provisions.

APF will draft the admission agreement using a standard template for the type of admission with slight variations to allow for the specific circumstances of the outsourcing. Included in the admission agreement will be Schedules setting out the members who have eligibility to join the LGPS. It is important to check that the details in the agreement are correct before it is signed, especially the employer details and eligible members in the Schedules, as amending the agreement after it has been signed by all parties will require a formal amendment. The APF’s preference is to use e-signatures (DocuSign) for signing the admission agreement, but where this is not possible you should allow additional time for the sending, signing and sealing of physical copies of the agreement.

Summary of responsibilities

Summarised below are the responsibilities on each party involved in ensuring LGPS eligibility of members are protected when outsourcing a service:

Who to contact

When you are ready to proceed or have any queries regarding joining the APF e-mail APF_EmployerAdmissions@bathnes.gov.uk