Politics of pensions burden on public sector contractors

15 June 2009

Politicians need to focus on the burden of public sector pension liabilities on contractors, says Mark Fox, otherwise the whole public private partnership regime will become unaffordable for contractors and possibly for government

These are extraordinary political and economic times. Westminster is consumed by its own issues and the atmosphere is increasingly febrile. Outside of Westminster though the world goes on. For members of the BSA that means conducting business in an economic environment that continues to be very challenging.

Ahead of the Budget the BSA made a submission. It set out our recommendations regarding the impact of taxation, finance and pensions policy on the UK’s business and outsourced services industry. We particularly emphasised concern over pension liabilities through the transfer of public sector staff to the private sector. This issue was not addressed in the Budget. Indeed as an industry, we are increasingly concerned that the seriousness and scale of the issue is fully appreciated in Whitehall.

The Government has said it remains committed to the continuation and expansion of the private sector in providing public services. We welcome that commitment because with the real and unavoidable pressures on government spending now and to come it is crucial public services are made more efficient. Outsourcing is a proven way of doing this.

BSA members are involved across the full range of public sector service delivery – education, food, health, waste management, housing and defence. They transfer staff from the Local Government Pension Scheme, the NHS Pension Scheme, the Principle Civil Service Pension Scheme and increasingly the Teachers Pension Scheme.

The BSA has been a longtime supporter of the concept behind Fair Deal and in particular of pension rights for former public sector workers. Over the years we have worked closely with the Government Actuary’s Department and the Treasury to ensure the Fair Deal regime is effective.

However, we believe this is no longer the case. The social and economic circumstances have changed significantly over the nine years since the introduction of Fair Deal. The inherent conflict between the Fair Deal policy and wider changes to pensions legislation is now:
● not providing the public with the best service or the taxpayer with value for money,
● putting employees’ pension benefits at risk, and
● seriously threatening the viability of a number of public sector outsourced service companies, especially those that are SMEs.

In addition, as the single biggest deterrent to private sector companies entering public sector markets it threatens the competitiveness of these markets.

We have two key areas of concern:
● The increasingly onerous requirements for providing expensive and volatile defined benefit schemes in relation to future service for former public sector workers. This is in direct contrast to other areas of public policy. Further, the requirement under current policy that contractors have to accept and credit on a d a y - f o r - d a y equivalent service basis the benefits the transferring employees have built up in the public sector scheme (should those employees so elect) adds to the risk and volatility for the contractor.
● Significant pension scheme deficits which crystallise into debts due from contractors when a contract is not re-let to them. For example, one contractor has a local government equivalent scheme currently fully funded on both the technical provisions (so pension scheme members are protected) and a FRS 17 accounting basis. However, should the contract not be re-let the contractor will be liable for a £30m debt based on an annuity buy-out cost. The company in question has a market capitalisation of £20m.
If only one of its contracts comes to an end it will be forced to cease trading. Clearly this is a desperate situation for the contractor, but it also has damaging consequences for the transferred staff and the sustainability of the public sector outsourcing programme.

In light of ongoing economic difficulties it is absolutely crucial the government takes action on this. Pensions are a long-term commitment, but the regulations around public sector outsourcing have lost this focus. Of key concern is the security of employees’ pension benefits, but also the long-term viability of public sector markets.

Some kind of compromise with industry is essential otherwise the whole public private partnership regime will become unaffordable for contractors and possibly for government. We believe that most of these concerns are solvable but will require coordinated HM Treasury and Department for Work and Pensions action to drive unified changes across Whitehall. The danger now is that political attention is increasingly drawn away from the hard business of government and is increasingly focused on the looming
General Election.

The fair and sustainable provision of pensions is developing into one of the greatest issues of modern British politics. Politicians of all parties are understandably wary of tackling what is a most difficult and sensitive issue – but it must be done. It will require real political leadership and goodwill from all those
involved.

● Mark Fox is Chief Executive of the Business Services Association (BSA) www.bsa-org.com