Issued on: 10 March 2011
Sarah Smart, Chair of Board of Trustees, The Pensions Trust says ‘The Hutton Report is making great steps towards reducing the pensions deficit in the public sector, however there are going to be severe knock-on effects for third sector organisations particularly. The report argues that it is undesirable for future non-public service workers to have access to public service pension schemes, given the increased long-term risk this places on the Government and taxpayers. It is essential to start making provisions now to ensure third sector pensions are not left behind. In particular, The Pensions Trust will be taking steps to ensure it is at the forefront of providing a system that facilitates outsourcing while still providing workers with access to good pension schemes.’
Sarah Smart is available for further comment on the Hutton Report.
Points that The Pensions Trust believes need to be addressed in more depth are:
1. Flaws in admitted body system
In the past, public sector pension schemes have enabled non public sector organisations to become ‘admitted bodies’ to the schemes so that they can offer equivalent pension benefits and therefore meet the qualification criteria for taking on outsourced contracts.
The admitted body system has a number of drawbacks:
• They present an unnecessary/uncontrollable risk to the taxpayer if the bodies are not monitored because if the organisation becomes insolvent the taxpayer ends up picking up the pension liability.
• They present a cost to the administering authority of monitoring the admitted bodies for example with covenant reviews, chasing late contribution payments, providing FRS17 accounting figures, etc.
• The structure is inflexible for admitted bodies if they want to modify their benefit structure in the future.
Therefore, how would organisations bidding for outsourcing contracts demonstrate they could offer comparable pensions benefits if there were no longer an admitted body system?
Only the largest organisations would be able to establish and run pension schemes similar to those in the public sector and it is questionable whether even those that could run such schemes would be prepared to accept the costs and risks involved. This would prevent many organisations in bidding
for outsourcing contracts, therefore reducing the competitiveness of this process. This would not meet the Government’s aims.
2. Non-associated multi-employer schemes
In order for smaller employers to be able to offer this sort of pension benefit, without becoming admitted bodies, it makes sense for them to join together in non-associated multi-employer schemes:
• The benefit of these schemes is principally the economies of scale to be gained in terms of investment fees and administration and advisor costs.
• There are also benefits in terms of continuation of service and transferability on the movement of staff between participating employers either on an individual or bulk basis.
• However, non-associated multi-employer arrangements have become increasingly unpopular in recent years due to the development of regulations which largely remove all of their advantages, principally the employer debt on withdrawal regulations. In the event of an employer ceasing to employ any active members in a multi-employer scheme, an immediate debt is crystallised equal to the employer’s share of the deficit calculated on the full buy out basis.
• Legislation is still needed to prevent scheme abandonment and protect members (including within multi-employer schemes) so we would not propose abolishing the requirement for an employer to make good its share of the deficit on withdrawal.
• A possible solution could be to encourage sectionalised multi-employer schemes.This could include removing the barriers that currently prevent last man standing arrangements becoming sectionalised schemes.
3. A review of regulatory framework in order to make multi-employer schemes for non-associated employers more viable. This should include:
• A review of the calculation of the PPF levy for
multi-employer schemes.
• Further amendments to the debt on withdrawal regulations to provide trustees with greater discretion.
• Creating a framework that enables grant maintained organisations to provide comparable benefits to the public sector without increasing the burden on the tax payer.
• Removing the administrative overhead that the public sector has to provide in respect of employers with admitted body status.
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