Review of ABS Provisions

DCLG sent out a consultative discussion paper on the practical operation of ABS on 20 July 2006 and comments were invited by 6 October 2006. A Workshop was convened on 29 September to discuss the paper before the end of the consultation period.

The following 20 responses were received:

	Body and Type	Response to proposals
1.	First Group Contractor has ABS in relation to 5 LGPS funds in England and Scotland covering 10,000 employees and former employees.	Welcomes the approach but if “pass through” is introduced they feel that they will be at a disadvantage when compared to new contractors as they have contracts running under the old ABS system. They would like retrospective measures to be considered so that long-term arrangements will be treated the same as new contracts.
2.	Gloucestershire County Council Administering Authority for the Gloucestershire Pension Fund	Their view is that protection needs to remain and our discussion paper places too much emphasis on the needs of the contractor. Their contractors could not claim to be unaware of possible pension risks as they provide information on the LGPS admission agreement and bonds. They believe that “Cap and collar” mechanisms can help reduce the risks of volatility but such arrangements will have to be reached within the commercial agreement with the contractor rather than the admission agreement. They require bonds to be provided by all admission bodies to minimise financial risks.
3.	Government Actuaries Department	They see the attraction of “pass through” arrangements but are concerned that the cost of legacy liabilities at the end of the contract should be borne by the employer and not fall to the Scheme employer (taxpayer). They also think that the cost of participation should be properly priced so a scheme-wide experience rating formula might be require to ensure consistency of treatment.
4.	West Sussex County Council Administering Authority for West Sussex pension fund	The Council think that it is imprudent to change the current ABS arrangements. They suggest that guidance on what local authorities might include in their procurement documents to ensure clarity on pension fund obligations and risks might be appropriate. The Council’s overriding concern is that the County Council as the major employing authority should not incur more costs as a result of the changes to the current ABS arrangements. They believe that the concerns raised about ABS were possibly raised by smaller less experienced contractors as larger contractors typically seek their own actuarial advice and often insist on “cap and collar” arrangements. Their Council provides a bespoke “Pensions Information Memorandum” so that contractors know the risks. If the proposals are adopted they would like equality for both in-house and out-house bidders.
5.	Society of County Treasurers Body representing local authority treasurers	They think that it is imprudent to change the current arrangements for the same reasons provided by West Sussex County Council.
6.	SITA UK Waste Management Company	SITA UK considers the amendments necessary to ensure a level playing field for all contractors and believe that “pass through” arrangements allow contractors to price pension risk at a known cost. They consider that the proposals are sensible but not the cost of increased longevity that will fall to the contractor. They would like further clarification here. They also feel that risk assessment is appropriate to ensure the contractor is viable. They would prefer firm statutory regulations to ensure that a level playing field is achieved.
7.	Charity Finance Director’s Group (CFDG) Umbrella charity that specialises in helping charities to manage their finances.	They are disappointed that the discussion paper largely ignores the impact the ABS arrangements have on the charitable sector. They believe that “pass through” will go along way to addressing the barriers to contracting with local authorities. They state that there is no surplus within contracts to absorb risk or meet shortfalls in pension schemes when contracts come to an end. They are concerned that many small charities contract for work from local authorities but have no funds to meet the potential liabilities from ABS. They would like more consideration to be given to those elements of risk that fall to the contractors/letting authorities and to details around “non-standard” transfers. They would prefer if the changes had the force of statutory provision to ensure regulations are enacted. They are concerned that many “broadly comparable” schemes are being closed or downgraded and are expensive so many charities will not offer this option in the future. They say that this sector has been affected by the Pensions Act 2004 and its new technical provision for the valuation of pension schemes.
8.	The Charities Consortium The Finance Directors of the 50 largest UK charities	Same response as above.
9.	Tameside Metropolitan Borough Council Administering Authority for Greater Manchester Pension Fund.	They consider that greater stability of cost for external contractors should not involve more effort or expense for administering authorities or scheme employers. They are concerned that past liabilities remaining with former scheme employers will cause difficulties in distinguishing elements of membership. Similarly distinguishing those matters under the contractors control from others will be difficult. They would prefer a locally agreed contribution rate for contractors which could be subject to “cap and collar”, with the presumption that any end of contract adjustment to be accepted as the responsibility of the scheme employer. This they believe does not require regulatory change.
10.	Gwynedd Council Pensions committee administrators of Gwynedd pension fund.	They support the view that ABS and a broadly comparable scheme should remain as available options. They support “pass-through” arrangements with reservations regarding the additional admin burdens on AA’s. They wish to retain the right for an admin authority to demand that a risk assessment bond or guarantor be included in the admission agreement if deemed necessary.
11.	Birmingham City Council Scheme Employer in the West Midlands Pension Fund.	They feel that ABS is a smoother process than securing a certificate by GAD for a comparable scheme. In a number of procurement exercises they require contractors to enter into an ABS and not offer a broadly comparable scheme. They consider that the decision should be made by the Council. They already have experience of fixing a contribution rate for a contractor/transferee admission body. They see the merit of this but believe that flexibility in the tender process should be maintained. They do not wish the risk management facility to be taken away as if a contractor goes bust and there is no bond then it is the Scheme employer (which they are) that faces a liability and not the pension fund. They are also concerned that there may be actuarial costs in apportioning liabilities.
12.	London Pensions Fund Authority Stand alone administering authority	The LPFA welcomes the general proposals and acknowledges that it will create a level playing field for contractors. They would like the regulations further amended to apply to membership gained under new tenders rather than to allow access via an existing arrangement. They would like guidance to be prepared centrally to support the revised regulations and to let contractors know which factors would adversely affect their contributions rate. The LPFA would prefer detailed amendments to be made to the regulations rather than being contained in statutory or non-statutory guidance. They feel that transitional provisions should be made for re-tender by an existing contractor.
13.	London Borough of Hackney Administering Authority for Hackney Pension Fund.	They have concerns with our informal discussion paper, in particular the arrangements for “pass through” and the potential removal of a termination valuation and the extra administrative burden that would be placed on administering authorities. They anticipate making a formal response when the formal consultation period commences.
14.	Sheffield City Council Scheme Employer in South Yorkshire Pension Fund	They are generally in favour of the proposed “pass through” arrangements but would not like this to be the only option available to contracting parties. The Council is in favour of past service deficits remaining with the Council, although they would like provisions included to safeguard the Council from increases in past service liabilities caused by factors under the contractors control. They would like the contractor to retain the risk on current service. The Council feels that the level of risk assessed by its actuaries is generally shows that an indemnity or bond is not required to be maintained by the contractor.
15.	Local Government Employers Body representing local authority employers	They do not object in principal with the “pass through” proposals; however they believe that the LGPS regulations should not make this mandatory. They would prefer that an authorative guidance was produced which allows authorities to decide whether to us “pass through” arrangements. They have concerns about the potential impact on FRS17 accounting numbers if complex cost sharing agreements became the standard practice. They would therefore like us to consult the Audit Commission about the accounting treatment. They would be happy to work with DCLG and other interested parties in the drawing up of appropriate guidance for authorities and contractors.
16.	Greater Gwent (Torfaen) Pension Fund Administering Authority for the Greater Gwent (Torfaen) Pension Fund.	Torfaen’s investment panel supports; the option of offering ABS or a comparable pension scheme. They agree that pension contributions should be set at the beginning of the contracting process. They agree that changes in contributions caused by factors within the contractor’s control should be met by the contractor They agree that there should not be any transfer of past service liabilities to a contractor. They do not support variations in contributions caused by changes in investment returns being met by the letting authority. They do not support any factors within the contractor’s control being spread as for the main fund and not over the remaining contract period if shorter They do not support the view that any deficit at the end of the contract should not be met by the contractor.
17.	Cartwright Consulting Ltd Consulting Actuaries who are involved with advising employers on the pension aspects of outsourcing arrangements from LG and other public sector areas.	They welcome the “pass through” proposals and anticipate recommending the ABS route if “pass through” is introduced. They believe that “pass through” arrangement leaves risk with the local authority so may be resisted by them. They therefore propose that the contractor pays a higher contribution in respect of future service to reflect that they are not bearing the investment risk. They are concerned that no termination costs could result in the contractor’s costs being passed on to another contractor or the local authority. They feel that risk assessment appropriate to the circumstances is always necessary.
18.	Hymans Robertson Consulting Actuaries	Hymans does not believe that the current ABS arrangements need to be radically changed and are of the view that any changes must involve education of contractors and awarding authorities. They do not believe that risk associated with ABS makes the broadly comparable option more attractive. They support the principals of “pass through” but do not necessarily believe that this is the most appropriate way of achieving the aims. They believe that “pass through” arrangements will impose an additional burden on administering authorities in terms of allocating costs between the awarding authorities and contractor and identifying the split between future and past accruals. They advise, that from an administering authority’s perspective it might be easier, (and cheaper) to limit exposure to risk outside the ABS agreement. They put forward an alternative approach.
19.	CBI	They are committed to the principal of ABS. They strongly support the establishment of “pass through” arrangements through revision of the LGPS 1997 regulations. They believe that full “pass through” arrangements would mean that only the risk which are under the control of the contractor are transferred from the contracting authority. They believe that the ABS reform should be resolved asap to allow time for the arrangements to bed down before a wider reform of the LGPS. They believe that indemnity bonds should be required only following appropriate risk assessment to ensure value for money is delivered, and are likely in most cases to be unnecessary.
20.	Price Waterhouse Coopers	They welcome the principal of “pass through” as an additional option in the best value process. They are concerned that the true cost of LGPS provisions has not been addressed and that in “pass through” the tax-payer ultimately, is acting as a guarantor. They are concerned that that the proposals require actuarial evaluation which introduces a level of complexity that may not be necessary. The advise that the practical difficulty of not having accurate details of transferring staff, needs to be considered if pension costs are going to be set out in the bid document. They suggest that the contractor could simply pay the rate that would be paid by the local authority. They propose a refinement to “pass through”. They suggest that payment costs could be taken away from contractors with local authority imposing a levy on contractors. Risk should be analysed and safeguards like indemnity/bond might be required but only if appropriate.
21.	TUC UNISON GMB (Joint union submission)	They believe that that the current ABS regulations do not allow clients and suppliers to balance pensions risks effectively, often to the detriment of the workforce. They believe that ABS is often not the option of choice as inappropriate pension risks are transferred to the contractor. They welcome ABS with “pass through”. They would like the introduction of compulsory open ABS with statutory full “pass-through”. They would like the case for the use of indemnity bonds to be given further consideration because of the cost and as a result of there being few bond providers.