Local Government Pensions Scheme in England and Wales - Scheme Improvements (Access and Protections)

Background on the admission body option 

69. As stated above, the government understands that most service providers have looked to meet the requirements of the 2007, 2012 and 2022 Directions, not by offering broadly comparable schemes, but instead using admission body agreements to join the LGPS as employers and therefore be able to provide staff with continued membership of the LGPS. However, this process is not always smooth for affected staff - it can be prolonged and costly, with delays meaning that admission agreements may not be in place before the contract starts and can be left unsigned for several years. This leaves transferred staff in limbo without accurate information about their benefits, and where affected individuals are approaching retirement age these delays can affect their retirement plans.  

70. Unfinished admission agreements also generate a significant administrative burden for funds and outsourcing bodies who must chase service providers to get them finalised. Where an admission body agreement is not in place once the contract has begun, funds are unable to invest contributions for affected staff, which results in a loss of investment returns and additional costs, which could in turn fall to the outsourcing body at the end of the contract.  

71. The increased use of admission body agreements for service providers has also contributed to the increasing number of employers in the scheme (13,033 in 2014-15 (14) compared with 21,131 in 2023-24 (15)). This creates an additional administrative burden for funds who must regularly engage with individual employers, sometimes with very few LGPS members on their staff. It also increases actuarial fees at fund valuations because actuaries need to assess each admission body and set their contribution rates.  

72. Where the admission body route is used there is also a risk of a significant payment being due at the end of a contract in the form of an exit payment or credit. This is because at the end of a contract the service provider will cease to be an employer in the LGPS (unless they retain the contract), and will become an exiting employer, meaning an actuarial valuation is required and any surplus or deficit needs to be settled. This is a significant risk for both the outsourcing body and the service provider, which can lead to service providers charging a risk premium, adding costs for the outsourcing body. 

73. Except under recent pass-through arrangements (see below), admission bodies have their own individual contribution rates. They will generally have a weaker covenant than outsourcing bodies (as they do not have tax-raising powers) and so the employer contribution rate they pay will often be higher than the rate of the outsourcing body. This leads to higher pension contributions and risk for service providers bidding for local government contracts. Admission agreements set out how that risk is transferred from the outsourcing body to the service provider, but the outsourcing body will either act as a guarantor, meaning they are ultimately still responsible for the pension liabilities if the service provider was unable to meet those liabilities, or the fund will require a bond or indemnity from the service provider. Even where the latter is used, this cost will often be passed on to the outsourcing body through the contract price, meaning that a very limited transfer of risk takes place. That risk reduces competition and means that those providers that do bid for services need to build in a significant buffer for pension costs into their contract price. This in turn makes outsourcing services more costly for outsourcing bodies.  

Introduction of the Deemed Employer route in the 2019 consultation 

74. In the 2019 consultation, the Government wished to encourage the use of pass-through agreements between Fair Deal employers and service providers. Under pass-through, a service provider may pay a fixed contribution rate for the life of the contract or pay the contributions within a certain range. The funding risk largely remains with the Fair Deal employer, who may retain responsibility for any shortfall in contributions, as well as the benefit of any surplus. 

75. Pass-through arrangements simplify the pension requirements for service providers and reduce the level of risk, which reduces the pension costs and could open the market for local government contracts.  

76. To encourage further use of pass-through the Government proposed a new route for service providers to access the scheme, called the deemed employer approach. As already referred to, deemed employer status means that, for specific groups of employees, their ‘Scheme employer’ is not their employer in employment law but is the deemed employer (the Fair Deal employer) instead. 

77. In other terms, the contracting authority would remain as the deemed employer for pension purposes for any transferred staff. As stated earlier, the deemed employer is considered to have the meaning given by Part 4 of Schedule 2 in the 2013 Regulations. For example, under the 2013 Regulations, the deemed employer for the employees of voluntary schools is the local authority. 

Removal of the admission body option and adoption of the deemed employer route

78. Responses to the inclusion of the deemed employer route were mixed. Some respondents felt that further clarity of the deemed employer route was needed in regulations, whilst others felt that it should be included as a default approach where agreement had not been reached prior to the start date of a contract.  

79. These concerns have been taken into account and the government is now proposing to create a clearer path for Fair Deal employers and service providers to consider when negotiating a service contract involving the transfer of protected transferees. Under these proposals, the deemed employer approach would be used for all future outsourcings by Fair Deal employers, except in exceptional circumstances. This would mean that admission body status would no longer be permitted for future contract outsourcing and/or re-awards. 

80. The government is proposing that future contracts adopt a clearly defined pass-through arrangement. The effect of that arrangement would be that the Fair Deal employer would be deemed to be the Scheme employer, whilst the relevant contractor would still take on some of the responsibilities of the Scheme employer. The detail of how those responsibilities are proposed to be split is further in “Responsibilities for relevant contractors”. 

81. The government considers this approach would have a number of benefits: 

• Over time this should halt the growth in, and ultimately reduce, the number of employers in the scheme. 

• It would ensure that in the future transferred staff would benefit from seamless access to the LGPS during and after a transfer because their employer for pension purposes would not change – nor would their scheme. 

• It would remove the administrative burden of chasing admission body agreements that are not signed by the contract start date, and should yield savings in both administrative and actuarial costs. 

• Whilst the funding risk would remain with outsourcing authorities, in the current system, where admission body agreements are used, risk is in theory transferred to the service provider but will have often been priced into the contract, meaning that it is the outsourcing authority who bears the risk of non-payment of pension contributions or financial failure of the service provider.