pensions for transferring employees on public sector outsourcing
by Roderick Ramage, solicitor, www.law-office.co.uk
first published (by distribution to professional contacts) on 31 December 2007
This article is not advice to any person and may not be taken as a definitive statement of the law in general or in any particular case. The author does not accept any responsibility for anything that any person does or does not do as a result of reading it.
The Best Value Authorities Staff Transfers (Pensions) Direction 2007
A new regime was brought into force by this direction effective from 1 October 2007 and made under ss101 & 102 Local Government Act 2003.
When local and other authorities outsource services, they do so normally by making a contract with a (usually) private sector business or charity for the for the service to be provided by the latter. The contract is almost invariably a transfer of an undertaking for the purposes of the Transfer of Undertakings (Protection of Employment) Regulations 2006, SI 2006/246 (formerly 1981) (TUPE). A major concern to the Government and public sector unions (but not necessarily to the private sector contractors) was that the exemption of mainstream pension benefits from TUPE (See my previous notes in December 2006 and June 2002) would result in the transferring employees, many of whom are in relatively low paid work, losing one compensating valuable benefit, membership of a public sector pension scheme, as a result of an act over which they have no control.
This was (or was intended to be) remedied by the Fair Deal for Staff Pensions guidance first issued by the Office of the Deputy Prime Minister in June 1999 (See http://www.hm-treasury.gov.uk/d/pensions_bta_guidance_290604.pdf for the Guidance Note by HM Treasury, June 2004), which required contracting authorities to impose on contractors an obligation to provide for transferring employees pensions, which are the same as or broadly comparable with the transferring authority’s public sector scheme. The current (October 2013) guidance note “Fair Deal for Staff Pensions” is now available at www.gov/government/publications/fair-deal-guidance, which cannot be accessed directly (tried 16/08/15) but can be found by eg a Google search for “Fair deal for staff pensions 2013”: see my website article. For instance a care home company or charity, taking over the management of a local authority home, could obtain admitted body status in the Local Government Pension Scheme as an alternative to establishing its own pension scheme. The weakness of the Fair Deal guidance is that it is not statutory, and its application and enforcement are patchy. If a public authority has a pressing need to outsource a particular service, the bidding contractor senses that it can drive a hard bargain and the local trade union branch is compliant, the guidance could be totally ignored, or a lower standard of pension offered. Sometimes the pension obligation, although imposed on the first contracting out of a service, is overlooked on subsequent transfers of the contract by the original contractor.
The Local Government Act 2003 gave power in sections 101 (staff transfer matters: general) and 102 (staff transfer matters: pensions) to make provisions, such as those in the Fair Deal guidance, statutorily enforceable in the case of best value authorities (including local, police, fire, rescue, National Park and many other authorities: see LGA 1999, s1), but, although draft directions had been issued under these sections in 2004 and 2005, no action was taken until a direction commonly known as the 2007 Direction, was issued by a letter dated 27 June 2007 from the Department for Communities and Local Government. The former link to these documents (http://www.communities.gov.uk/publications/localgovernment/authorities-staff-transfers) produces 80,447 hits on the .GOV website, but Google finds the direction in the national archive.
the effect of the 2007 direction
On a first contract, the contract by a best value authority and the contractor must provide that:
(i) the contractor secures pension protection for each transferring employee (ie transferring under TUPE); and
(ii) the provision of pension protection is enforceable by the transferring employee.
On a subsequent contract, (eg where the original contractor transfers the contract to another or otherwise ceases to perform it), the contract between the authority and the subsequent contractor must provide that:
(i) the subsequent contractor secures pension protection for each transferring employee; and
(ii) the provision of pension protection is enforceable by any original transferring employee (ie who had transferred under the first contract).
“Pension protection” is secured for the transferring employee if, after the change in employer, he has, as an employee of his new employer, rights to acquire pension benefits and those rights are the same as or broadly comparable to or better than (in the case of a first contact) those that he had, or had a right to acquire, as an employee of the authority and (in the case of a subsequent contract) those that he had, or had a right to acquire, before the latest change of employer.
1 The contacting authority is under an obligation under s101(3) of the LGA 2003 the 2007 to comply with this (and any other) direction.
2 The transferring employees must be given a contractual right to the pension rights in the direction.
3 Therefore, although TUPE is not altered, the practical effect of the direction is that employees transferring under TUPE bring with them their pension rights or rights broadly similar to them.
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