A couple of months ago I reflected on the potential clash between the Big Society and our litigious culture. How, I wondered, will small organisations taking over local services cope when faced with legal claims, once the support of the legal department from the local authority or NHS Trust is no longer available?
Craig Dearden-Phillips has spotted an even bigger spanner in the works; public sector pensions.
There are several public sector schemes, each a little different, but all have three things in common. One is that they are a “defined benefit” – you get a proportion of your final salary linked to inflation. The second is that the employer (the state) contributes up to 20% of the employees’ salary – much more than is now usual in other sectors (0%-6% is fairly common). The third is that most schemes are in deficit – meaning that the payouts are not covered by those paying in. The bill for this is picked up by HM Treasury, and the most recent official estimate of the total cost of these unfunded liabilities is £770bn.
All this is highly relevant for the divestment of public services to social enterprises and the third sector. If the government insists that former public sector workers are offered a “broadly comparable” pension once they move into these new bodies, then we have a potential show-stopper on our hands. Taking on these pension commitments creates a huge obligation for the third sector.
Many of the charities, social enterprises, GP consortiums and other organisations that take over public services will struggle to match the terms and conditions of the staff transferred to them under TUPE. If they have to provide comparable pensions too, the cost will cripple them.
Craig give an example of one charity which was suddenly presented with a £360,000 bill for pensions by the local authority from which it had transferred some employees. At this point, it would be easy to get on our high horses and huff on about due diligence but, unless you have dealt with a merger or the outsourcing of services, this is something of a dark art. This charity is probably not the first to find itself taking on liabilities it didn’t anticipate and it won’t be the last.
TUPE rules don’t require the new employer to give comparable pension benefits but they do stipulate that some form of pension should be provided. How far these pension provisions should match up to those of the transferred workers’ former employers is open to interpretation. The public sector unions will fight any attempt to reduce pension provision for transferred workers and will almost certainly use any ambiguity in the law to bring legal action.
Earlier this month, charity chief executives wrote to John Hutton, who is heading the government’s review of public sector pensions, urging him to review the current guidelines on TUPE and public sector pensions. The response from the unions was predictably combative.
The other option, of course, would be for the government to carry on picking up the cost of pensions for those employees transferred out of the public sector. This is almost certainly a non-starter. It would, rightly, invite the charge that profits and assets were being privatised while losses and liabilities were nationalised. In any case, part of the government’s rationale for moving public services into the third sector is to get some of that unfunded £770bn off its books.
Pensions, then, could indeed be a show-stopper for the shift in public service provision to the third sector. The public sector unions know this which means that pensions will become an industrial relations battleground over the next few years.
But this is all a symptom of a bigger problem. The government is aiming to transfer the provision of public services, and the staff that go with those services, from some of the largest and oldest organisations in the country to some of the smallest and newest. This will be a huge challenge for everyone involved. If you have worked for a large established organisation for years, moving to a much smaller and newer one will be like going to another country. Likewise, if you have only ever managed in a small organisation, leading people who still have a big organisation mentality will be difficult.
As I have said before, the government’s proposed restructuring of public services is the biggest HR project since the 1940s. Pensions provision is one potential stumbling block but there will be plenty more along the way.