This guidance note has been prepared in parallel with the Local Government Pension Scheme (Amendment) (No. 2) Regulations 2003. It supersedes the Local Government Pension Scheme (Amendment etc) Regulations 1999 guidance note, which was issued by the former Department of the Environment, Transport and the Regions in February 2000. The guidance is neither definitive nor exhaustive and it is not intended to provide an authoritative interpretation of the regulations. The Department has issued related guidance, which this note does not seek to replicate in detail. Where it is appropriate, details of the relevant guidance materials are set out below.

The guidance applies to local authorities and other interested parties in England and Wales who have responsibilities for, and who wish to be associated with, the arrangements set out in the Local Government Pension Scheme Regulations 1997 as amended. It is particularly intended to assist those parties who may be involved in the implementation of the regulations where they apply to private sector contractors considering admitted body status in the LGPS. However, ultimately, it is a matter for interested parties to take their own legal advice on the interpretation of the relevant provisions and their application in specific circumstances.

Regulation 5 of the Local Government Pension Scheme Regulations 1997 (as amended) provides access to the LGPS for private sector contractors involved in the outsourcing of contracts and in the delivery of local authority services. Since coming into force in January 2000, its effectiveness and operation have been monitored, and its usefulness discussed with the Stakeholder Group of local authority employers, representatives of contractors and the trades unions. Contacts have also been maintained with other interested parties, including individual local authorities, contractors, trades union interests and representative bodies.

The overall effect of the legislation and its implementation has been beneficial; amendments have been introduced to simplify both the admission agreement process and the structure of the regulations themselves. The purpose of the changes, therefore, is to provide clearer regulation covering the procedural requirements for the admission of certain bodies and to amend the requirement for transferee admission bodies to provide an indemnity or bond, where the relevant Scheme Employer has identified the need for such a measure, following a risk assessment.

Interested parties will wish to take careful account of the following documents and guidance notes which relate to the contracting out of local authority services:-

ODPM Circular 03/2003 – Best Value and Performance Improvement, which includes the following statutory guidance :–

Handling of Workforce Matters in Contracting; and

Code of Practice on Workforce Matters in Local Authority Service Contracts

Statement of Practice on Staff Transfers in the Public Sector (Cabinet Office: January 2000), which includes :-

Staff Transfers from Central Government – A Fair Deal for Staff Pensions (HM Treasury: June 1999); and

Assessment of Broad Comparability of Pension Rights – Statement of Practice (Government Actuary’s Department: May 1999)

The Local Government Act 2003 (the Act) received Royal Assent on 18 September 2003. Sections 101 and 102 of the Act allow for the Secretary of State to issue directions to best value authorities in England and Wales to provide how employment and pensions matters will be treated in the contracting of services.

The Secretary of State will issue directions shortly. In the intervening period the Government expects all best value authorities involved in contracting out services to follow the Department’s circular 03/2003 and, in particular, the Code of Practice on Workforce Matters in Local Authority Service Contracts as statements of policy on how the public sector should handle TUPE and pensions issues.

Under the annex to Statement of Practice on Staff Transfers in the Public Sector, A Fair Deal for Staff Pensions, there are two permissible ways of achieving the pension protection. In the case of employees who are eligible for membership of the Local Government Pension Scheme (LGPS), there is the option for the new employer, if they wish, to seek admitted body status within the LGPS. Transferred staff will then continue to have access to that pension scheme for their future service, to ensure continuity of pension accrual. Where staff are not offered this option they must be offered membership of an alternative scheme by the new employer which is actuarially certified as being ‘broadly comparable’ with the public service scheme (as defined in the Statement).

Alternatively, where a transfer to a broadly comparable scheme is offered, the relevant authority must be in a position to offer bulk transfer terms to the scheme provided by the new employer. Individuals are not required to be party to such a transfer, which should be sufficient to provide service credit in the new employer’s scheme on a day for day basis (or such equivalence determined by actuaries taking account of differences between schemes) for those who wish to transfer their accrued rights from the LGPS.

Negotiations to establish fair treatment in respect of pensions for transferring staff as part of business transfers should be based from the outset of the procurement process, on a careful identification of the appropriate pension options, their full costs, liabilities and actual transferee data. Throughout the whole of this process, local authorities should ensure that staff are treated fairly, trade unions and staff are informed and kept in touch with developments and that the operation is open and transparent.

Interested parties will wish to note the provisions of Statutory Instrument 2003 No. 662; The Local Government (Best Value) Performance Plans and Reviews (Amendment)(England and Wales) Order 2003. This Order introduced a requirement on Best Value authorities, in conducting a best value review, to consult trades unions and employees’ from the outset of the process.

Paragraph 7 of the Code of Practice on Workforce Matters in Local Authority Service Contracts provides that where a service provider subsequently recruits new staff to work on a contract alongside staff who were transferred from the relevant local authority, those staff will be offered employment on fair and reasonable terms and conditions which are, overall, no less favourable than those of the transferred employees. The code sets out the permissible pension arrangements that may be utilised to achieve this.

The Local Government Pensions Committee of the Employers’ Organisation for Local Government issued detailed guidance, The Pensions Implications of Transferring Employees to an External Provider (April 2000). The Department understands that the LGPC will, in due course, revisit and update their guidance in light of recent regulatory changes. The current guidance is available on their website: www.lg-employers.gov.uk.

In May 2003 the Department circulated draft guidance from HM Treasury, Bulk Transfers as a Result of a Procurement Exercise. The purpose of this guidance is to improve the way in which public sector employers go about providing bulk transfer agreements for their staff. It will provide greater reassurance to the staff concerned; a more open, transparent, and predictable basis upon which potential private sector partners compete in modernisation and reform projects; and greater ease and efficiency for public sector employers and their pension scheme administrators involved in these projects. The final version of the guidance will be issued in due course.

The Local Government Pension Scheme is a statutory-based, public service pension scheme, as defined by section 1 of the Pension Schemes Act 1993. Its rules in respect of benefits, administration, transfers, funding and other matters, are contained in secondary legislation made under section 7 of the Superannuation Act 1972. The LGPS is classed for Inland Revenue purposes as an approved tax-exempt pension scheme, and is contracted out of SERPS. Any changes to the form and content of the Scheme’s provisions must be made, with the agreement of Ministers, by means of a statutory amendment to the 1997 regulations.

The Local Government Pension Scheme (Amendment) (No. 2) Regulations 2003 amend the provisions covering admission agreements to simplify the process and clarify the statutory requirements to facilitate a clearer understanding of the process and so improve compliance.

The changes introduced by these regulations do not apply to admission agreements entered into before 19.12.2003, the date the amending regulations come into force. There is a facility to backdate to 1 January 2003.

To simplify the structure of the 1997 regulations those regulations that enable local government employers to make admission agreements with certain non-scheme employers have been restated and expanded. The requirements for admitted bodies have been divided into two separate regulations, one detailing Community Admission Bodies and the other, Transferee Admission Bodies, in order to reduce the need for extensive and somewhat circular cross-referencing.

Community Admission Bodies

The new regulation 5 provides for an administering authority to make an admission agreement with any community admission body. Regulation 5(2) explains which bodies are community admission bodies, broadly they are bodies that provide public services other than for gain, and which have links with local government. The new regulation 5(2) expands on the previous regulation (5(3)) and brings all the provisions relevant to community admission bodies together to improve simplicity and bring improved clarity to the regulations.

Regulations 5(2)(a) and 5(4) provide that the Secretary of State may approve a body for admission to the Scheme as a community admission body, subject to such conditions as he thinks fit. The Secretary of State may withdraw approval at anytime if such conditions cease to be met.

Transferee Admission Bodies

Regulation 5A enables administering authorities to make admission agreements with any transferee admission body. Regulation 5A(2) provides that a transferee admission body is:-

a body which is providing, or will provide, services or assets in connection with the exercise of a function of a Scheme employer as a result of:-

i) the transfer of the service or assets by means of a contract or other arrangement between that Scheme employer and the body;

ii) a direction made under section 15 of the Local Government Act 1999; or

iii) directions made under section 497A of the Education Act 1996;

Regulation 5A(2)(b) extends the definition of transferee admission body to include bodies (other than community admission bodies) that carry out a public service and have been approved by the Secretary of State for admission to the Scheme.

Admission of non-local authority employers to the LGPS takes place by means of a formal, contractual admission agreement, drawn up between the interested parties. Under the terms of the regulations, the effect of such a step is that:-

(i) eligible employees of the admitted body can fully participate in the Scheme and so can be described as pensionable employees; and

(ii) the regulations governing the Scheme treat employees of an admitted body exactly the same way as if they were employed by a Scheme employer. The admitted body must therefore take such actions as required of LGPS employers as defined in the regulations. For admission status and membership status to continue, the admitted body must adhere at all times to the Scheme regulations, including, of course, the specified terms of their individual admission agreements.

Any admission agreement must terminate if the admission body ceases to be such a body (Regulation 5B(2)).

Where an administering authority makes an admission agreement, it must notify Inland Revenue and the Secretary of State for the Office of the Deputy Prime Minister. It must notify the Secretary of State of the date of the admission agreement, the admission body’s name and, where the agreement is with a transferee admission body, the name of the relevant Scheme employer. The administering authority is required to inform the Commissioners of the Inland Revenue of the agreement in accordance with section 605 of the Taxes Act 1988. Currently the prescribed time period is any time not later than 180 days after the end of the scheme year (1 April) in which the agreement was made (Regulations 5B(3)-(4)).

Schedule 2A provides that copies of all admission agreements, in their final form, must be made available for public inspection at the offices of the administering authority.

Generally, the form and content of admission agreements will be a matter for discussion and determination by the interested parties. However, an admission agreement in relation to a transferee admission body shall make provision for the relevant matters set out in the amended Schedule 2A.

Where any admission body transfers staff, who were originally in the employ of a scheme employer, to a sub contractor in relation to the provision of services or assets in connection with the exercise of a function of the Scheme employer, the sub-contractor will be required to either become an admission body or become party to the admission agreement with the originating admission body in respect of those staff. Further, where the sub-contractor recruits new staff to work alongside such transferred staff they will be required to observe the matters set out in paragraph 12 of this guidance. This should also be picked by the contracting authority as part of their ongoing contract monitoring responsibilities.

Where any signatory of the admission agreement has a dispute on any matter which is directly relevant to the terms of the agreement, he may request, under regulation 5B(6), that the Secretary of State resolves it. But employees who are Scheme members by virtue of an admission agreement, must use the LGPS internal dispute resolution procedures.

Schedule 2A (as amended) sets out a number of mandatory matters which must be included in each admission agreement prepared in relation to a transferee admission body. The matters in the Schedule are largely self explanatory and the Schedule has been improved in terms of clarity and simplicity following consultation with interested parties and in light of responses to informal consultations.

Interested parties will also wish to consider, in the context of formulating each particular admission agreement, how far any additional matters to those required by the amended Schedule 2A should be specified in it in order to reflect the terms of a specific contract. Such additional items could include, for example:-

(i) any agreed local arrangements for consultation between stakeholders, including trades unions;

(ii) the scope and the opportunity for introducing any on-going beneficial changes to the agreement;

(iii) the appropriateness of annual reports being prepared for the admitted body;

(iv) any notifications specified in Schedule 2A to be sent also to an appropriate local employee representative organisation and/or staff association at the same time;

(v) any other matters which are believed to represent best general and local practice in the context of particular business transfers.

Regulation 5A(6) provides that an admission agreement with a transferee admission body shall require the relevant body to carry out an assessment, taking account of actuarial advice, of the level of risk arising on premature termination of the provision of the service or assets by reason of the insolvency, winding up or liquidation of the transferee admission body. Where the admission agreement is with a transferee admission body under regulation 5A(2)(a) the transferor Scheme employer is required to carry out the assessment. Where the admission body is concerned with the provision of a public service and is approved by the Secretary of State under regulation 5A(2)(b) the transferee admission body is required to carry out the assessment to the satisfaction of the relevant administering authority.

Regulation 5A(6) provides that where the level of risk identified by the assessment is such as to require it, the transferee admission body is required to provide an indemnity or bond to meet the level of risk identified. Regulation 5A(7) details with whom the indemnity or bond must be with and extends the previous definition to now include reference to bodies that may accept deposits, rather than simply those permitted to effect and carry out contacts of general insurance.

The intention behind retaining a requirement to assess whether there is sufficient risk to require an indemnity or bond is to ensure that local council tax payers should not have to underpin a contractor’s pension liabilities in the event of their commercial failure during the life of the admission agreement. However, where the risk is assessed as insignificant, the absolute requirement for such bodies to provide an indemnity or bond is removed.

Interested parties will wish to recognise the difference in approach and legislation that exists between the LGPS, which is not subject to the Pensions Act 1995 minimum funding requirement, and private sector funded pension arrangements. In the LGPS, the liability to pay pensions falls initially to the relevant administering authority and ultimately the employing authority. In conjunction with their actuary, an administering authority is required by the regulations to establish an appropriate employer contribution rate. The 1997 Scheme regulations require that employer contributions must be set at a rate to ensure fund solvency, so as to maintain as nearly constant a rate as possible. It is important for potential contractors, and their actuarial advisers, to be made aware of the specific regulations and the solvency regime that operate within the LGPS and for the appropriate pension fund involved, and the arrangements which exist to manage past, present and future liabilities. Such matters will need careful (initial pre-tender) discussions, assessments and decisions, during the initial pre-tendering phase and more significantly on finalising the contract.

In this context, the actuarial matters relevant to admission agreements established within the terms of the LGPS are particularly significant. They impinge on virtually all decisions to be taken into consideration by the interested parties, including those of private sector contractors considering the admitted body status option within a possible business transfer.

By their very status, LGPS admitted bodies must comply with all the regulations which govern the Scheme. The key provisions governing employers’ requirement to pay contributions and other actuarially related matters are contained in Part IV, Chapters I – IV of the 1997 regulations.

In particular regulation 75 of the 1997 regulations provides administering authorities with specific powers to establish, where they deem it appropriate, an admission agreement fund (or funds); the Secretary of State must be notified if and when such a step is taken. Specific requirements as to its operation and security are also set out in the regulations.

Regulation 77(3) of the 1997 regulations requires that contributions paid to pension fund authorities by employers (which includes any admitted body) be based on two elements:-

(i) a "common" rate established by the fund’s actuary in light of the prevailing actuarial circumstances; and

(ii) an "individual adjustment" to reflect the actuarial circumstances of an individual employer in the particular fund.

The administering authority must obtain a rates and adjustments certificate every three years that shows the contributions to be paid to the pension fund for each of the following three years. The certificate must set out the assumptions as to the liabilities arising in the period covered by the certificate.

Regulation 78 requires the administering authority to obtain revised rates and adjustment certificates in specific circumstances:-

Regulation 78(1) provides that an administering authority must obtain a revised rates and adjustments certificate where a separate fund is established under regulation 75;

Regulation 78(2) provides that where an admission agreement ends the administering authority must obtain an actuarial valuation of the outstanding liabilities attributable to the admission body and a revised rates and adjustments certificate showing the contributions due;

Where it is not possible to realise the outstanding contributions from an outgoing transferee admission body (or from any relevant bond or indemnity) regulation 78(2A) provides that the administering authority may obtain a revised rates and adjustments certificate to show the contributions due from the transferor scheme employer. Where the outstanding liabilities are unrealisable from an outgoing community admission body, such a rates and adjustment certificate will show the revised contributions due from all employing authorities within the fund;

Regulation 78(2B) provides that an administering authority may obtain an actuarial certificate to show the amount an admission bodies’ common rate or individual adjustment will be amended to provide the necessary fund assets to meet the admission bodies’ liabilities at the end of the agreement; and

Regulations 78(3) & (4) provide that an administering authority must obtain a revised rates and adjustments certificate where an employing authority award an augmented period (but agree not to fund the liability by a capital payment). A revised certificate is also required where it appears to the administering authority that the liabilities in respect of an employing authority will be greater than amounts used in the assumptions in the relevant rates and adjustment certificate.

The actuarial principles and practices that emerge from these statutory requirements, combined with the mandatory requirements set out in the revised Schedule 2A (and any others which may be added subsequently), will allow a fund’s actuary to provide in the triennial valuation report, or in any modification to it, the appropriate calculations of liabilities ascribed to each admitted employer, and assets allocated to it.

The implications, in terms of the actuarial assessed liabilities of an admitted body employer, are as follows:-

(i) employer contributions will be assessed and set in the light of the details of employees transferred, to ensure that the benefits which accrue to them are properly funded over the period of the contract. Contributions will be reviewed at each triennial valuation and could be varied within that period. Exceptionally, a contractor may agree to fund a portion of an accrued deficiency. Where this is the case, actuaries should make this clear by quantifying it in money, or percentage of payroll, terms at the outset of the tendering process;

(ii) whether or not the actuarial gains and losses arising within the contract period (including effects on service prior to the contract, eg pay increases) will fall to the contractor, following the statutory triennial valuation exercise;

(iii) the cost of any employer discretions being exercised, in accordance with the Scheme provisions, will be charged to an admitted body either upfront, or on an ongoing basis. Discretions available within the LGPS could, for example, involve an employer granting added years, the payment of capital sums upfront, and a reduction in employee contributions where service is over 40 years;

(iv) the cost of all other employer decisions, for example pay awards, which increase the liabilities in respect of an admission body beyond those envisaged in the actuarial assumptions on which the relevant rates and adjustment certificate was based will be charged to the admitted body either upfront or on an ongoing basis;

(v) the costs, relating to the strain on the fund where employers make employees redundant, and their pensions come into payment immediately and before the scheme’s normal retirement date will be charged either up front, or on an ongoing basis; and

(vi) at the end of the contract, if the contract and the admission agreement are renewed, any accumulated surplus will be resolved by the fund’s actuary with the contractor.

The Department is currently consulting interested parties on proposals to introduce a requirement for each administering authority to prepare and publish a Funding Strategy Statement. It is currently envisaged that this requirement will be introduced from 1 April 2004 and that administering authorities will be required to have produced a Funding Strategy Statement, and to have it in place, by 31 March 2005. Amendments to this guidance note will be required following the proposed introduction of a Funding Strategy Statement.