Could public sector pensions scupper the Big Society?

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.

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5 Responses to Could public sector pensions scupper the Big Society?

  1. Pingback: Could public sector pensions scupper the Big Society? - Rick - Member Blogs - HR Blogs - HR Space from Personnel Today and Xpert HR

  2. Laurie A says:

    On the face of it, TUPE only requires the replacement of a final salary pension with a scheme that matches contributions up to 6%, which is not particularly onerous.

    But there are a number of complicated overlays on this in the public sector.

    First, any extra bits of the pension scheme that don’t relate simply to ordinary retirement, invalidity or survivors benefits will transfer over in full. Things like early retirement rights and enhanced redundancy payments contained within a pension scheme will transfer.

    Second, as Rick points out, the “broadly comparable” requirement (not contained in TUPE but required as a matter of practice in the public sector) can have onerous funding requirements. I’ve certainly had public sector outsourcing or transfer deals fall apart on the this question. Apart from the simple cash cost of the pension, putting in place the admin arrangements for a “broadly comparable” pension is beyond the reach of many smaller organisations.

    There have been some attempts to deal with this – for instance, the “retention of employment” model adopted in the NHS, where employees continue to be employed in the public sector for pension purposes, and “seconded” to the private sector contractor, but that was never wholly satisfactory, and its availability is restricted.

    The government could readily remove the “broadly comparable” requirement without any need for a change in the law, but this would provoke outrage amongst employees and unions. This (and the related question of the two-tier code of practice) are essentially political questions for the government to wrestle with.

  3. Jez says:

    My understanding (and there are many people far more knowledgeable than I reading this blog, so please correct me) is that TUPE only applies if one is transferring into an equivalent role in a new organisation. As GPs take on commissioning, for example, there is an assumption that many of the staff of the PCTs will go and work for them – but in new, yet to be defined roles that may be innovative and unprecedented. These may well not be “equivalent” roles and, if I’m right, not subject to TUPE.

    And isn’t there an implicit assumption in TUPE that whole functions will transfer to a new employer, as in the outsourcing model? Under current circumstances it might be that functions will simply disappear and employees scattered piecemeal around different employers – yet in the part of the public sector I know, there is a blanket assumption amongst employees that they will be transferred en masse to a new employer.

    Given that TUPE is a legal minefield I’d be very surprised if someone isn’t already thinking about ways of circumventing it. I could be talking bollocks though and am very happy to be put right..

  4. Rick says:

    Jez, you’re not talking bollocks at all. Whether or not someone is covered by TUPE depends on how ‘the undertaking’ is defined. If your work is core to the undertaking and the new entity takes on that undertaking then you transfer. In reality, of course, this is open to interpretation. The unions will argue that the whole lot should be transferred, the employers will try to minimise it in just the ways you describe. The lawyers will get very rich!

    You’re also right that some functions will simply disappear. I keep banging on about this but I think the penny still hasn’t dropped for a number of people. You can’t have a 25% cut and hope that the Third Sector will pick the same stuff up up and do it 25% cheaper. As you say, some jobs will just cease to exist.

    The problem for small organisations is thet even relatively few people transferring to them with protected terms and ‘broadly comparable’ pensions could still sink them financially. My money is on the government dumping the ‘Fair Deal’ guidelines or at least removing the ‘broadly comparable’ pension requirement.

    I’m not sure how this would work for the civil service. If redundancy payments are immutable, as the court ruled earlier this year, then civil service pensions, which are covered by the same legislation, might be too. I’m reaching the limits of my pensions and legal knowledge here, but I wouldn’t be surprised to see the civil service unions take legal action if the government tried to remove their TUPE pension protection.

  5. Vince Lammas says:

    Rick makes a good point about the new, small organisations which the Coalition government would like to take over public services. I agree the pensions issues are enormous for public services and the creation of the Big Society.

    While the commissioning functions of PCTs are currently in focus when looking at transfering functions, don’t forget the provider arms – with the encouragement to establish mutuals and social enterprises – have even larger number of people impacted by a possible changes in pension eligibility. This is a major issue for the local reward strategy of organisations and the employment decisions of NHS employees.

    I explored this issue here : http://www.attractorconsulting.com/2010/08/working-in-a-denationalised-health-service/

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