Shedding a tier

By 'level playing field', the Government really means to ensure that contractors' members of staff, whether new or transferred under the Transfer of Undertakings (Protection of Employment) Regulations 1981 – otherwise known as the TUPE Regulations – enjoy benefits packages that are similar to or better than those previously enjoyed by local Government or 'best value' staff formerly employed in the roles being transferred.

The Government's plans are to be enforced via the Code of Practice on Workforce Matters in Local Authority Service Contracts, which must be included in the terms of any contract agreed between a local authority or other 'best value' authority and either its private or voluntary sector partner.

Those authorities and agencies involved in 'best value' include local authorities, National Park authorities, Broads and police authorities, fire and civil defence authorities, emergency planning, waste disposal and passenger transport authorities, Transport for London and the London Development Agency.

Protecting terms and conditions
In essence, the Government's Code is designed to ensure that new joiners will be offered terms and conditions of employment which are, overall, "no less favourable" than those of transferred employees. This doesn't mean the contractual conditions have to be the same, though. The Government recognises a need for flexibility, but according to an official statement this "must not result in an overall outcome that is less favourable".

Apparently, this doesn't apply to pensions, but under the terms of the Code any new joiners must also be offered a "reasonable pension provision" – which might materialise either in the form of the Local Government Pension Scheme (LGPS), membership of a good quality employer-style scheme or "membership of a Stakeholder pension scheme with an employer contribution".

The Code of Practice on Workforce Matters in Local Authority Service Contracts requires security contractors to confirm their obligations to protect the terms and conditions of transferring local Government employees, including their right to ongoing access to the LGPS or an alternative, good quality occupational pension scheme. Such measures complement the provisions made in the Local Government Bill, which will require local authorities to secure this protection for any transferring staff.

Local Government minister Nick Raynsford has had much to say on the subject. "High quality local services depend on a high quality and highly motivated workforce," stated the Labour MP. "That is why the Government announced it would introduce measures to ensure all those contractors selected to provide services to local authorities in England and Wales have policies which will secure that high quality workforce throughout a contract."

In an official statement issued by the Office of the Deputy Prime Minister, Raynsford added: "The Code will prevent good contractors operating to high quality employment standards from being undercut by those willing to abuse the system. It will also remove the risk that service quality is undermined during the life of a contract by a service provider who's willing to drive down staff terms and conditions. However, the Code of Practice will not prevent local authorities or contractors from addressing productivity issues by working with their staff in a positive manner to achieve continuous improvement in the services which they deliver."

In practice, the Code will not apply retrospectively to any contracts that have already been advertised or entered into. All authorities will be required to confirm in their annual 'Best Value Performance Plans' that individual contracts comply with the requirements in the Code. In addition, the National Audit Commission's appointed auditor will provide assurances that local councils are meeting their obligations through the audit of those plans.

The Government is now taking forward primary legislation in the Local Government Bill to give the Secretary of State powers to ensure that contracting exercises by local authorities in England and Wales are conducted on the basis that, where public sector employees transfer, their terms and conditions of employment are always protected.

That is unless exceptional circumstances prevail, which may indeed be the case where, for example, the activity is essentially new or a one-off project, or where the features of the service are significantly different.

What does it all mean?
What, then, does the new legislation mean for security companies providing a service in the public as well as the private sector? Of major concern is the fact that the announcement on pension provisions is – at best – ambiguous.

On the one hand, it states that transferring employees moving from the local authority to the contractor must be offered either retention of the LGPS or a broadly comparable scheme.

On the other hand, the legislation states that new joiners must be offered one of the following options:

• membership of the LGPS, where the employer has admitted body (Adbod) status within the scheme and makes the requisite contributions;

• membership of a good quality employer pension scheme, either in the form of a contracted-out, final salary-based and defined benefit scheme or a defined contribution scheme (noting that, for defined contribution schemes, the employer must match any employee contributions up to a ceiling of 6%, although either party could pay in more if they so wished);

• a Stakeholder pension scheme, under which the employer will match employee contributions up to the same level of 6% of earnings, although once again either or both parties could pay more if they so desired.

In essence, the Government appears to be saying that whatever the scheme provided, it must be seen to equate to a final salary scheme or at least stand the test of being a reasonably well-funded alternative.

The Government’s Code of Practice requires security contractors to confirm their obligations to protect the terms and conditions of transferring local Government employees

The whole pensions issue has not been properly thought out, and security contractors are left having to make a stark choice when submitting their proposals to local authorities. They can either seek Adbod status to the LGPS, admit new members to the company's existing final salary scheme (if they indeed have one), set up a scheme approved by the Government's Actuarial Department (whereby Government actuaries approve the type of benefit provided) or look to make sure that a Stakeholder scheme receives sufficient contributions.

Hidden dangers in pension schemes
At first glance, the Adbod LGPS would appear to be the most favourable final salary scheme for the security contractor. The scheme already exists, is acceptable to local authorities and all contributions are defined. The Government has recognised that small companies shouldn't be disadvantaged if they don't have their own final salary pension scheme, and thus encourages Adbod membership.

The danger here lies in the fact that an admitted body – ie the security contractor – is proportionally liable for the entire scheme. For instance, if 1% of the pension scheme members TUPE across and a 'black hole' is found, the admitted body is responsible for 1% of it (notwithstanding that the whole issue has arisen due to historic conditions and funding, or that actuaries have given statements on previous positions).

Certain pension funds in the commercial sector (as well as certain local authority pension funds) are already in deficit. The true level of those deficits will become ever more apparent in the three-yearly valuation (otherwise known as the triennial valuation).

The solution to the problem would appear to be simplicity itself – include in any tender submissions a caveat excluding the security company from liability should a local authority pension fund have insufficient resources at a later date. Legal opinion suggests that if a local council were to give an indemnity on pensions it would be ultra vires. That is to say that councils aren't actually in a position to offer such indemnities.

Upon the termination of any contracts, if it's found that insufficient contributions have been made, or there's a shortfall for any other reason, the contractor could be called upon to make up the difference at that time.

GAD-approved: the safer option
A Government Actuarial Department (GAD)-approved scheme is the safer option, but this too is fraught with difficulty for the security company. Such a scheme is very expensive to set up. Typical costs are £5,000 for start-up with annual running costs of £4,000. In addition, contributions to the scheme are likely to be higher because the LGPS only considers the funding levels every three years (thus making tender prices less competitive than is the case with the Adbod scheme).

It too can have a long-term liability if the funds in it fail to match liabilities. The advantage of a GAD-approved scheme is that at least the fund is controlled directly by the security company.

The Stakeholder pension scheme is a money purchase scheme where the risk lies solely with the individual ('Staking a claim', SMT, April 2001, pp36-38). This is the most easily managed scheme, and the one which most contractors would favour if they had a choice. The difficulty comes in persuading transferring staff that a Stakeholder pension scheme is preferable to a final salary scheme (because the risk here is with the scheme members themselves, and not the pension provider).

The aim of publishing a Code of Practice on the two-tier workforce was to remove the financial advantage – to 'best value' authorities – from the labour element of contracting out. However, the inclusion of pensions in the new Code has had the effect of making it more difficult for authorities to assess 'best value' as they compare their own contributions to in-house pricing with that of a contractor's GAD contribution pricing (the contractor's pricing being the more realistic).

As things stand, contractors who become Adbod members of the LGPS could face an unexpected and possibly hefty liability if the LGPS is in deficit.

It would appear that this element of the Code of Practice on Workforce Matters in Local Authority Service Contracts hasn't been thought through well enough, and will undoubtedly have a negative impact on business opportunities for security companies operating in the public and private sectors.