APRIL 2015

LCP CORPORATE PENSIONS TOOLKIT

Pensions and redundancy issues within public sector outsourcing remain complex; employers should fully understand their commitments to avoid costly surprises.

Why outsourcing contracts will remain complex to employers for many years: Companies bidding for new public sector contracts will generally welcome the Government’s “New Fair Deal” policy as it removes a number of the complex pension commitments that have historically been in place when involved in public sector outsourcing. However, as with most things involving such benefits, it still isn’t all that simple, for example:

� the New Fair Deal does not yet apply to local authority contracts which are still covered by the “Best Value” rules;

� “second generation” transferees may still require a broadly comparable scheme even under the New Fair Deal;

� there may be HR issues to deal with if a successful bid results in employees transferring from a broadly comparable scheme to a newly reformed public sector scheme with increased employee contributions and less generous benefit structures;

� any planned redundancy exercises on successful bids could prove expensive if the underlying redundancy rules aren’t fully understood;

� there can be complex interactions with the new auto-enrolment regime if taking on employees who have previously opted out;

� termination terms of existing contracts could result in funding hits, P&L hits, and section 75 debts or cessation payments when the contracts end; and

� the differences between the New Fair Deal and Local Government Admitted Body agreements need to be

carefully communicated within businesses.

Whilst the New Fair Deal should reduce complexity in the longer term, actions taken in the short to medium

term for outsourcers can help to avoid surprises and manage costs.

LCP public sector outsourcing service

Shortfall to be priced by bidders

Top-up to be paid by incumbent contractor

Bulk transfer from incumbent contractor’s broadly comparable scheme

Bulk transfer

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commercial contract

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LCP is a firm of financial, actuarial and business consultants, specialising in the areas of pensions, investment,

insurance and business analytics.

Contact us to find out how we can help your business

If you have any questions on this, or any other items within the LCP corporate pensions toolkit, please contact:

Phil Cuddeford

Partnerphil.cuddeford@lcp.uk.com

+44 (0)20 7432 6676

Alex Whitley

Partneralex.whitley@lcp.uk.com

+44 (0)1962 872717

How our service can help your business � We will help you negotiate and price appropriate pension and redundancy terms and provisions within the contracts for which you are bidding

� We will help you understand the available options when your existing “broadly comparable” pension scheme ceases to have any active members on public sector contracts

� We will help you decide whether to transfer employees from your broadly comparable scheme back to the public sector mid-contract to mitigate your pension risks and negotiate revised contract terms

� We will help you understand the likely bulk transfer terms applicable on cessation of a contract for your broadly comparable scheme (and the funding/P&L implications)

� We will help you model potential future cash costs under different contract terms and varying future economic scenarios

� We will help you estimate, or formally calculate, redundancy costs both under new bids and existing contracts

� For new entrants to public sector bidding, we will help you understand the pension expectations placed on you

� We will help you decide whether to choose a lower risk investment option for your admitted body within a local authority pension fund

� We will help you put in place appropriate policies for assigning employees who may change role within your business after initially joining on outsourcing contracts

� We will help you understand your obligations with regard to certain “quasi-government” special cases (eg ESPS and Railways Pension Scheme protected persons)

Example Public sector bidding is a key business stream for the organisation, which has a range of current contracts in place with a range of different termination dates. The organisation is also in the process of bidding for a number of new contracts. Conscious of the complexities associated with a relatively new regime, the employer asked for an audit of the pension and redundancy commitments associated with its contracts.

Following the review, the employer not only has a better understanding of the potential future costs and risks to which it is liable, but it has also been able to reduce them through a re-evaluation of funding terms, and a negotiation on contract terms.