Story tools

Print this article

Email to a friend

Your feedback

More than two-thirds of contractors who take on outsourced local authority services are unaware of a potential sting in the tail on their pension costs, according to a survey published today by consulting actuaries and administrators, Punter Southall.

The survey of contractors active in the local authority sector revealed a widespread lack of awareness that councils often use much weaker assumptions to assess LGPS pension values at the start of a contract than they do at the end. This means that councils are able to transfer their existing pension liabilities to contractors for much less than they themselves are expecting to charge to take those liabilities back from the contractor at the end of the contract.

Commenting on the findings of today's survey, Punter Southall's John Prior said:

“The most worrying finding from our survey is that contractors are not always fully aware of what they're taking on when embarking on outsourced local authority contracts. Councils often allocate assets to the contractor at the start of a contract using completely different assumptions to those used to measure the liabilities at the end. In some cases this is not even disclosed up front. This difference in assumptions can lead to a shortfall of 30% or more from day one of the contract, even though the council will say that the contractor’s pensions are “fully funded” at the start.

Our survey also found that one in three respondents had already experienced unforeseen increases in pension costs and our concern is that the triennial valuation of local government pensions, due to take place later this month, is likely to expose a further deterioration in the funding position. We suspect that means that some contractors are in for a nasty surprise when their current contracts come to an end. 

Whilst respondents to our survey felt that the councils themselves did not always appreciate the pension risks involved with the contracts, it is reassuring to note that a significant number had managed to agree pass-through or similar risk-sharing. However, all respondents felt that standardisation of pass-through would increase the likelihood of contractors bidding.”

Amongst other key findings from the survey are:

·         The vast majority of respondents believe that Local Authorities prefer bidders to become an LGPS Admission Body so that transferring employees can remain in the LGPS, rather than joining the contractor’s own Broadly Comparable Scheme

·         Where pass-through or other similar risk-sharing is available, contractors also prefer the Admission Body approach, but otherwise the choice between the two approaches is finely balanced

·         Almost 80% of respondents prefer to offer only a defined contribution scheme for new hires on their Local Authority contracts

·         Some Local Authorities do not provide adequate and timely pensions data and information to contractors during the bidding process

"Local Authority PFI/PPP Outsourcing Contracts Pensions Survey", published today, is a postal survey of a range of contractors active in the local authority outsourcing sector. For copies of our Survey please contact Laura Speight on 0118 912 2824 or Laura.Speight@puntersouthall.com