To tender or not to tender – it’s a pension question

David Davison

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Recent experience has suggested to me that many third sector bodies are missing out on perfectly viable out-sourced engagements because they are not adopting an effective approach to dealing with the associated pension risks.

 

With considerable pressure on public finances it seems inevitable that there will be a move to out-source increasing amounts of public services to the private sector. This undoubtedly represents a very significant opportunity for the third sector as their skills and specialisms would make them a very attractive home for many of these services.  However, organisations should not be attracted to the bright lights without having a full understanding of the risks and pitfalls which might await them.

One of the most significant risks facing third sector organisations in tendering for these services is that of pension provision. There is undoubtedly an increasing awareness of the issues as many organisations have already been burned by previous ventures however understanding of the issues and options is far from universal.

Organisations tendering for out-sourced public services need to comply with the requirements of “A Fair Deal for Staff Pensions” published by HM Treasury in June 1999. This requires tenderers to provide staff transferring from the public sector with ‘broadly comparable’ pension benefits which in the vast majority of cases will mean final salary pension provision. This can be achieved either via the organisations own pension scheme or more likely via seeking admitted body status to a public sector pension scheme.  There have been some suggestions that the ‘Fair Deal’ provisions would be removed  although to date this has not been confirmed.

It is widely understood that the provision of final salary pension benefits is not only expensive but the actual cost of provision is highly uncertain. The approach adopted to dealing with the pension issues, which may well be the most significant deciding factor between a successful contractual arrangement or a loss making venture, will be vital.

The actual process undertaken and the timescales for provision of information make it very difficult for organisations to adopt an effective approach around pensions.  This means that they either underestimate their potential impact and pursue the appointment without having effectively quantified the risk or decide the risk makes the engagement unviable and decide to withdraw. I have certainly seen an increasing propensity amongst clients to consider the latter the most prudent course of action, and who can blame them. This is an approach which is unlikely to be in the outsourcers best interests as with fewer organisations competing the likely result will be a higher price and/or poorer service.

So are organisations missing out on out-sourced appointments which they may be able to obtain on viable terms? I would suggest that the answer to that question could well be yes.

There has undoubtedly been a much greater understanding of the risks involved from outsourcers and a much greater willingness to recognise a shared responsibility for pensions and enter in to some form of effective risk sharing arrangement with the successful tenderer. There is a growing acceptance of the unfairness of expecting tenderers to accept the risk for pension liabilities built up many years prior to their involvement and frequently of considerable multiples of those which would be accrued over the period of any contract.

Organisations need to be provided with information on pension provision as early as possible in the tender process to allow them to evaluate risk effectively with the support of their professional advisers and to factor in an appropriate cost for this as part of their estimate for the provision of services. It should be possible to factor in the key issues as part of the budgetary process and whilst the pension risk cannot be removed completely there is a good chance it can be effectively managed. The final details of any risk sharing agreement can then be finalised as part of the formal contractual arrangements which will reflect the final details of the staff to be transferred and the terms of the final engagement.

It is all too easy to be attracted to an engagement which may offer the organisation little potential for commercial viability, let alone success. Equally it is all too easy to walk away from something which does present a commercial opportunity. Potential exists for a win-win scenario here if the right approach is adopted and suitable, experienced professional support is engaged early enough in the process.

David Davison

Post by David Davison

Specialist consultant on pensions strategy for corporate, public sector and not for profit employers