INTRODUCTION

1. This guidance has been prepared in conjunction with the Local Government Pension Scheme (Amendment etc) Regulations 1999, recently circulated under cover of the Department’s letter of 13 January 2000. The regulations which, for the most part came into force on 13 January 2000, amend the Local Government Pension Scheme Regulations 1997 principally by modernising the existing membership access arrangements, as well as extending the scope in the Scheme to allow the entry of specific types of employers by means of admission agreements. The guidance is neither definitive, nor exhaustive and is not intended to provide an authoritative interpretation of the regulations. It will, from time to time, be updated in the light and experience of implementing the regulations.
   
2. The guidance applies to local authorities in England and Wales who have responsibilities for the pension 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. It supersedes the guidance issued on 7 June 1999 by the Department and the Inland Revenue and complements the pensions advice recently issued as UKSC Circular No 77. But, ultimately, it is a matter for interested parties to take their own legal advice on the interpretation of the new provisions and their application in specific circumstances.
   

BACKGROUND

3. In the specific context of the LGPS, Ministers believe these new regulations will ensure that the membership provisions of the Scheme are efficient and effective, clearly expressed and fully accessible for those eligible private sector employers in particular who may wish to seek membership of the Scheme through its admission agreement arrangements.
   
4. The regulations encompass much of the analysis and consultations undertaken by the Local Government Association/United Kingdom Steering Committee on Local Government Pensions (soon to become the Local Government Pension Committee), the TUC and its affiliated trades unions, the Business Services Association and the CBI, who jointly signed the Heads of Agreement document of February 1999 and subsequently published as UKSC Circular No 65.
   
5. The Agreement was welcomed by Ministers as a basis for developing new ways of protecting employees’ pensions in the LGPS both in the delivery of Best Value and when other forms of business transfers from local government to the private sector take place. The Agreement has directly influenced the development of these regulations. Ministers wish to see them implemented with the continued co-operation and assistance of the interested parties who have contributed so effectively to their development.

NATIONAL POLICY GUIDANCE

6. Associated closely with these new regulations are several statements of policy guidance which, taken together, provide a helpful framework for the regulatory changes now introduced to the LGPS. Local government and all the other interested parties will be aware of the following:-

(i) Staff Transfers from Central Government – A Fair Deal for Staff Pensions – Guidance to Departments (HM Treasury: June 1999);

(ii) Guidance on Best Value – (DETR Circular 10/99, December 1999); and

(iii) Staff Transfers in the Public Sector: Statement of Practice (Cabinet Office: January 2000).

7. Interested parties will wish to take careful account of these documents and their guidance which seek to underpin the Government’s fair employment agenda and its commitment to ensuring that the public sector is a good employer. The key principles recommended in all these references are:-

• to treat staff fairly;
• to do so openly and transparently;
• to involve staff and their representatives fully in consultation about pensions aspects of the transfer at an early stage; and
• to have clear accountability within the local authority for the results.

8. In particular, LGPS interests will wish to note paragraph 91 of the Department’s Best Value guidance (and particularly the reference to "other public sector contracting authorities") which states:-
   
   "The Government also wishes to see that employees’ pension entitlements are secured in staff transfers to the private sector. The Statement of Practice includes HM Treasury guidance entitled Staff Transfers from Central Government: A Fair Deal for Staff Pensions. That guidance was drafted with specific reference to staff transfers from central Government departments and Agencies, on whom it was binding immediately, but Ministers said at the time that they also wanted other public sector contracting authorities to make arrangements to meet the standards of protection for staff pensions which it set out, consistent with the law and good procurement practice."

9. The Department’s guidance states, in paragraph 92, that in order to ensure continuity of pension accrual in business transfers, transferred staff should be offered membership of a pension scheme broadly comparable with their public service scheme and which is actuarially certified to the standard of the criteria for broad comparability as set by the Government Actuary. The guidance goes on to emphasise the importance of protecting staff pensions in transfers to the private sector within the context of the Fair Deal for Staff Pensions guidance referred to above.

10. Paragraph 92 also refers to the need for agreed bulk transfer terms being established with a new contractor’s pension scheme so that "staff transferring will be able to transfer their accrued service credits into that scheme on a day-for-day, or equivalent, basis". The regulations governing the LGPS already allow for bulk transfers of this type to be agreed by actuaries representing both parties where a transfer of an undertaking occurs. It will be essential in every case for the appropriate fund’s actuary to assess the amounts involved and for full recognition of this to be taken into account by the relevant parties in the setting of a final contract price.
    
11. The National Joint Council for Local Government Services published a framework agreement as Circular 7/99 on 25 October 1999, with the support of the other key stakeholders, dealing with employment relations issues involved in Best Value. The agreement has much in it which is relevant to pensions in the context of business transfers. In particular, paragraph 7 states:-


"Where it is proposed that a service is outsourced, the need to ensure that the workforce has a full understanding of and involvement in the process is crucial. Use of the authority’s joint consultative arrangements to achieve understanding is important. An example of involvement in the process would be the participation of employees in discussions with external bidders. Moreover, the Council as transferor has a duty to safeguard, as far as it lawfully can, the rights and interests, including in relation to pay, conditions and pensions, of the transferred employees."

12. Local authorities and other interests may already be aware of Policy Statement No. 4 prepared by the Treasury Taskforce on the disclosure of information and consultation with staff and other interested parties involved in PFI contacts. Copies are available on the internet at http://www.hm-treasury.gov.uk or from 0171-270 4558. The approach, involving effective communication and consultation with and between all the parties, subject to compliance with the relevant legislation, commercial confidentiality and necessary legal advice, is taken forward in the statements and guidance referred to above.
    
13. All interests involved in implementing Best Value in the delivery of local government services will wish to consider the extent to which this guidance and best practice can be adequately reflected in the appropriate documentation they prepare as part of their business transfer projects, whichever particular pension option may be finally chosen by contractors.

                    TUPE

14. Occupational pensions are not presently covered by the Transfer of Undertaking (Protection of Employment) Regulations 1981 (the TUPE regulations). The Government, in order to bring greater certainty to the processes involved in transferring staff to new employers, intends to amend the TUPE regulations in order to implement the revised Acquired Rights Directive and to improve their operation. The intention is that TUPE will apply to all staff transfers under best value, and will protect employees during the life of a contract. This will build upon the definition of a transfer secured in the revised Directive, adopted during the UK Presidency in 1998, in order to achieve as great a degree of certainty and clarity as possible in the Regulations’ application (including the reassignment of contracts). The revised Directive also allows individual Member States the option of including occupational pensions within the terms which are protected by national legislation when an undertaking transfers between employers. A consultation paper will be published as soon as possible, with a view to making new Regulations later in the year.
    

                    THE SCHEME

15. The Local Government Pension Scheme (the LGPS) 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 a tax-exempt approved 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.

LGPS POLICY FRAMEWORK

16. The Government attaches a high priority to the fair treatment of staff involved in business transfers from the public sector to the private sector. There should be certainty and clarity in all transfer arrangements, and staff who transfer should be treated fairly and consistently, and have their rights protected.

17. The White Paper Modern Local Government: In Touch with the People (CM4014, July 1998) emphasised, in the context of Best Value, the importance of securing fairness in the market place, as well as combining re-assurance to employees with the necessary flexibility to allow transfer on a fair basis to other employers where this is in the public interest. It highlighted also the importance of securing greater certainty in transfers in protecting the terms and conditions of employment, and considered the option of providing admitted body status in the LGPS for private sector contractors engaged in the delivery of local authority services. These particular principles have now been carried forward by the new regulations.

 

SCHEME AMENDMENTS

18. The new provisions, in addition to modernising, clarifying and simplifying the well- established admission agreement processes already available within the LGPS regulations, introduce a new, statutory-based option which allows private sector employers, involved in the delivery of Best Value, to seek access to the Scheme as admitted bodies, subject to certain mandatory conditions, including compliance with the other statutory requirements of the Scheme regulations which apply to contributing employers.
    
19. Admission agreements entered into before 13 January 2000, in accordance with the Scheme regulations extant at that time, are not affected by the changes introduced by these regulations.

20. The LGPS regulations already allow access for membership purposes to private sector contractors who are engaged in joint venture arrangements with local authorities. This amendment was introduced by regulation 4 of the Local Government Pension Scheme (Miscellaneous Provisions) Regulations 1999 and came into force with effect from 1 April 1999. Regulation 5(3)(g) carries this provision forward in the Scheme.
    
    ADMISSION TO THE LGPS AND ADMISSION AGREEMENTS

21. The regulations set out in detail all the new admission agreement bodies now included in the Scheme regulations with effect from 13 January 2000. The following categorisation may assist:-
    
            Group A

    Admission bodies which correspond (or could correspond) to Inland Revenue’s definition of an associated employer as set out in Practice Note IR12, 1997, Part 21.1:- those described by regulations 5(3)(a)(i), (b) (if 50%, or more, funded by a scheduled employer),(c),(d),(e), (f) and (g).

    Group B

    Admission bodies which correspond (or could correspond) to Inland Revenue’s definition of non-associated employer:- those described by regulations 5(3)(a)(ii), (b) (if under 50% funded) and (h).

22. Group A  admission bodies can be regarded as being broadly those bodies which have regularly been previously admitted to the LGPS, including companies of the type described in regulation 5(3)(g) as part of a joint venture arrangement. No indemnity or guarantee is required for these bodies.
    
23. Group B bodies may be regarded principally as those employers who may wish to opt for and seek admitted body status as part of a specific business transfer from the public to the private sector, including Best Value, PFI or PPP transfers. A guarantee or indemnity will be required of those bodies, which fall under regulations 5(3)(b) and 5(3)(h), and the Secretary of State may require such an arrangement as part of his approval of those bodies which fall under regulation 5(3)(a)(ii).

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

(i) 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 the admitted body in exactly the same way as if it were a Scheme employer. 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.

25. Generally, the form and content of admission agreements will be a matter for discussion and determination by the interested parties. However, an admission agreement for bodies within regulation 5(3)(h) must reflect at least the matters now specified in Schedule 2A.
    
26. To bring greater certainty and clarity to the formulation of admission agreements between all the parties, Schedule 2A sets out a number of mandatory matters of substance which must, therefore, be included in each admission agreement prepared under regulation 5(1) where transferee admission bodies referred to in regulation 5(3)(h) seek admission. The matters in the schedule are largely self-explanatory and have been prepared in the light of detailed consultation with key interested parties and in the light of responses to the statutory consultation exercise on the draft regulations.
    
27. 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 Schedule 2A should be specified in it in order to reflect the terms of a specific contract. Such items could include, for example:-

     

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

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

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

    (iv) the circumstances for requiring annual reviews of indemnity insurance arrangements;

    (v) 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; and

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

28. The UKSC, in close consultation with key interested parties, is developing the outline of a specimen model admission agreement to reflect the content of Schedule 2A and other matters.

29. Several requirements are imposed by the regulations specifically on transferee admission bodies which fall within the category of regulation 5(3)(h). These involve meeting the requirements of:-

• Regulation 5(7)(a) – a best value authority, which is not the administering authority, must also be a party to the agreement;
• Regulation 5(7)(b) – only employees of the admission body employed by virtue of a specific contract providing local authority services are available to benefit from LGPS membership. However, this provision would not exclude any new employees, taken on by a contractor to work on the delivery of the service, from joining the LGPS by means of an amendment to an existing admission agreement, subject to compliance with the extant provisions;
• Regulation 5(7)(c) – requires the provision of an appropriate level of indemnity or bond in an approved form and with an authorised insurer or a relevant institution;
• Regulation 5(7)(d) – requires any admission agreement with an admission body to include all the matters contained in Schedule 2A of the regulations. Other matters which the parties agree to being included in an agreement may, of course, be subsequently added.

30. Regulation 5(7)(8) requires that an administering authority must enter into an admission agreement with an admission body where it chooses to apply for admitted body status and where it and the local authority letting the contract meet the requirements of the regulations.

31. Regulation 5(6) requires an admission agreement with an admission body of the particular type described in regulation 5(3)(b) to provide for a guarantee from the sponsoring body to meet the body’s liabilities to pay all accounts due from it under the regulations. This guarantee would not, for example, apply to a contractor who is required by regulation 5(3)(7)(c) to provide an indemnity or bond as a condition of admission. Regulation 5(12) imposes specific duties on an administering authority to notify the Inland Revenue of bodies admitted to the Scheme and to provide information which may be requested by the Revenue (see SI 1995/3103).

DISPUTES

32. 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 5(14), 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.
    
    INDEMNITY INSURANCE
33. An admission body as defined by regulation 5(3)(h), must secure an actuarially appropriate level of indemnity, or bond, in an approved form so as to be able, as required by regulations 5(7)(a) and (c), to satisfy the relevant administering authority and the best value authority under regulation 5(17)(c). The collective purpose of these particular requirements is to protect LGPS pension funds from risk of any permanent financial loss and to guard against any deficiencies or shortfalls in the event of insolvency, or from any default by a contractor in the payment of contributions due to pension funds as may be determined by an actuary.
    
34. The Department commends to the interested parties what it understands to be the best practice of conducting annual reviews of indemnity cover in order to take full account of any changing factors and liabilities covered by the original arrangements. This review could feature as an additional required item in individual admission agreements as suggested in paragraph 27.
    
35. A contractor seeking admission to the LGPS will need to establish, through information supplied in confidence, at the very earliest stage in the pre-tender process by the relevant local authorities, the scale of assessed and future likely costs to be covered by insurance arrangements. Information on staff, their age, length of service and pay and other relevant matters will need to be made available. Some assessments should be made with regard to potential pension fund liabilities arising from expected and assumed redundancies, early retirements and ill-health retirements. Because the relevant local authorities will be required, under the regulations, to approve the cover and period of agreement, sufficient time must be allowed to enable appropriate specialist advice to be sought and all preparatory work to be completed.
    
36. Regulation 5(17)(a) set out the qualifications of authorised insurers from whom the appropriate type and level of insurance may be obtained. Regulation 5(17)(f) sets out the meaning of "relevant institution" in the context of the provision of indemnities or bonds. With effect from 1 January 2000, the Financial Services Authority became responsible for the authorisation of those institutions under the Insurance Companies Act 1982 and those parts of the Banking Acts specified in Section 2 (4) of that Act. Institutions who may be so authorised are required also to comply with all the supervisory and regulatory requirements of the Authority and to file annual returns as directed. For further information on whether or not an insurance company is authorised contact: Financial Services Authority, 25 The North Colonnade, Canary Wharf, London E14 5HS on 0845 6061 1234 or access via the website address www.fsa.gov.uk
    
37. Administering authorities, when admitting bodies funded by scheme employers under regulation 5(3)(b), must now have regard to the need for sponsoring bodies to provide a form of guarantee in respect of potential pension liabilities not being met in the future. The Secretary of State, when approving bodies under regulation 5(3)(a)(ii), may also require, as part of any approval, that a similar guarantee is put in place. Whilst the conditions applying to indemnity provision are not replicated as requirements of any guarantee, consideration should be given by the parties to much the same issues in their assessments.
    


ASPECTS REQUIRING ACTUARIAL ADVICE

38. 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 their 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. If interested parties believe it to be necessary, the Department will bring forward regulations to provide for a means to resolve issues of dispute in this area. In the meantime, it will do all it can to ease any issues of difficulty with any party to a potential transfer where this may become necessary.

39. 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.
    
40. 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.
    
41. 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.
    
42. 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:-
    
1. a "common" rate established by the fund’s actuary in the light of prevailing actuarial circumstances; and
2. an "individual adjustment" to reflect the actuarial circumstances of an individual employer in the particular fund.
   

43. Regulation 6 of the 1999 regulations introduces three important amendments to regulation 78 of the 1997 regulations. These deal with the circumstances which involve revised actuarial valuations and certificates being obtained. In particular, the changes provide new powers for an administering authority to obtain from the scheme actuary a certificate specifying the extent of an adjustment to the contribution at the common rate, or the amount by which any prior adjustment should be increased or reduced. These amendments are designed specifically to provide flexibility to the actuarial processes involved in admission agreements made with contractors in the business transfer context.
    
44. The actuarial principles and practices that emerge from these statutory requirements, combined with the mandatory requirements set out in the new Schedule 2A (and any others which may be subsequently added), 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.
    
45. The implications, in terms of the actuarially assessed liabilities of an admitted body employer, are as follows:-
1. 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 be asked 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;
   
2. all 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;
   
3. the cost of any employer discretions being exercised, in accordance with the Scheme provisions, will be charged to an admitted body either up-front, or on an on-going basis. Discretions available within the LGPS could, for example, involve an employer granting added years, the payment of capital sums up-front, and a reduction in employee contributions where service is over 40 years;
   
4. 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 on-going basis; and
   
5. at the end of the contract, if the contract and the admission agreement are renewed, any accumulated surplus or deficiency can be rolled-forward. If the contract is not renewed, any deficiency or surplus will be resolved by the fund’s actuary with the contractor.
46. The Department is grateful to the Association of Consulting Actuaries’ Local Government Committee for its assistance in the preparation of this part of the guidance. Further detailed guidance on the actuarial aspects of transfers, particularly involving non-associated employers, will be issued by the UKSC as soon as possible.

LOCAL GOVERNMENT PENSIONS DIVISION

                    DEPARTMENT OF THE ENVIRONMENT, TRANSPORT AND THE REGIONS

JANUARY 2000

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