2011 Public Sector Outsourcing Report looks at potential changes to the Fair Deal policy, the government’s review of public sector pension schemes, and discusses specific issues affecting local authority contracts.
Reform of the government's Fair Deal for pensions policy will be a key driver in improving competition in the outsourcing of public sector contracts, according to LCP's Public Sector Outsourcing Report published today.
Bart Huby, Head of LCP's Public Sector Outsourcing Group, commented: "We are in a period of major change for public sector pensions and one that will provide significant challenges for those bidding for outsourcing contracts. However, while it's inevitably a complex area and brings considerable uncertainties, if the government gets it right there should be more opportunities for a wider range of organisations to become involved in providing public services. We may also see the emergence of a new and more attractive model for pension provision - and one from which the private sector may have much to learn."
The Fair Deal
The Fair Deal policy, which was introduced in 1999 and is being reviewed as part of the government's current review of public sector pay and pensions, means that contractors currently have to provide significantly different pensions benefits to different components of their workforce - with transferees from the public sector often enjoying much higher benefits than private sector employees performing the same role. This means that the costs and risks associated with pensions when taking on public sector contracts can often deter potential outsourcers, particularly smaller operators, from bidding.
Paul Metcalf, Partner at LCP, said, "Reform of the Fair Deal is a complicated issue, balancing protection of transferring employees' reasonable pensions expectations with making it more straightforward and less risky for potential contractors to bid, and the outcome of the consultation process is difficult to predict. There is no silver bullet - however, successful reform could create more competition in the market and could also be a deciding factor in whether the government achieves its wider aim of outsourcing more services to SMEs."
LCP's report reveals that on local authority contracts, where transferring employees are able to continue in membership of the Local Government Pension Scheme as a way of satisfying the Fair Deal requirements, outsourcing contractors can be faced with demands for substantial extra unanticipated payments if they blindly accept the standard pension provisions that apply in such circumstances.
Tim Sharples, Partner at LCP, said "This is becoming an increasing problem on local authority contracts entered into several years ago which are now coming to an end, with substantial termination payments frequently being required. At the same time, however, informed contractors are increasingly managing to negotiate a reduction in funding risks on new contracts, as more local authorities recognise that it can be cost-effective for them to retain those pensions risks which contractors are not able to influence by their actions."
Public sector pensions reform
The report also examines the significant changes that are being proposed to the various public sector pension schemes as government spending cuts lead to increased scrutiny - and threats of major strike action by some trades unions. These schemes cover over 5 million employees, approximately one sixth of the employed labour force in the UK, and employer costs can be considerably higher than is the case typically in the private sector.
Changes to these schemes include the switch from RPI to CPI for pension increases made last year (though currently subject to judicial review), which hit the value of public sector pensions by around 15%. This shift alone reduced the capital cost of existing public sector scheme benefits by approximately £200bn. This is the equivalent of an average loss in value of about £16,000 for each of the 12 million workers with benefits in public sector schemes.
The changes now under negotiation between the government and the unions concern increases to member contributions and changes to benefits as recommended by the Hutton Review, with many members being asked to pay more, retire later and get less. The report looks at what Lord Hutton really said, in particular what he recommended should stay the same, what should change, and what the politicians should decide.
The full report will be available for registered download at www.lcp.uk.com
|
