Agenda item

This report outlines the preferred arrangements for contractors participating in the Brent Pension Fund.

John Smith (Pensions Manager, Brent Council) introduced the report, which outlined the preferred arrangements for Contractors participating in the Brent Pension Fund. The Committee noted that Brent Pension Fund’s actuary, Hymans Robertson, had prepared a discussion document outlining the principles, benefits and risks of using ‘pass-through’ for its admission agreements which included a comparison with the current ‘traditional’ approach.

In providing an overview of the proposal, John Smith explained that outsourced LGPS members had a right to remain within the LGPS scheme and therefore an agreement was required between the Letting Authority and the Contractor regarding factors such as the Contractor contribution rates, bonds and cessation fees. Due to the need to determine the above elements, the conventional approach, which passed investment risk to the contractor, resulted in high consultation fees, more expensive contracts for the Letting Authority and a slower overall process. Thus, to improve this process, it was proposed to introduce a ‘pass-through’ policy which passed significantly less pension risk to the Contractor and reduced the costs of participation. This was largely due to the Contractor’s contribution rate being equal to the Letting Authority’s contribution rate and Contractors not being liable to pay cessation fees, which reduced uncertainty for Contractors seeing as they were not exposed to potential volatile market conditions, which was said should improve the competitiveness of the tendering process for LGPS Letting Authorities.

After the introduction of the report, the Committee welcomed Douglas Green (Hymans Robertson LLP) to the meeting, who provided an analysis of the risks and benefits of pass-through in addition to outlining why the policy was being proposed, which is summarised below:

•         In outlining the current approach of the Fund regarding outsourced contracts, detailed in Appendix 1 of the report, Douglas Green emphasised the number of onerous administrative steps which were required for outsourced contracts, many of which concerned a small number of employees. Members noted that given that outsourced contracts tended to involve a relatively small number of employees, the administrative and consultative steps required for the current method outweighed the potential risks presented by pass-through.

•         The main risks of the proposed pass-through policy included:

        The Letting Authority being responsible for a potential cessation debt at the end of contract if the Contractor contribution rate was too low, although any debt tended to be a small sum given the size of outsourced contracts.

        Loss of a potential exit credit at the end of contract for the Contractor if their contribution rate was too high.

        Assets and liabilities remaining on accounting balance sheet of the Letting Authority, although this would occur if staff remained within the Letting Authority and therefore this risk would be borne by Letting Authorities anyway.

•         The main benefits of the proposed pass-through policy included:

        The possibility of better contract negotiation terms for Letting Authorities as Contractors often increased the price of contracts due to uncertainty and the investment risk being passed to the contractor.

        No potential cessation debt to pay at the end of the contract by the Contractor if their contribution rate was too low.

        Reduced administrative costs for the Contractor as there was no requirement for a market risk bond, which could lead to better contract terms for Letting Authorities.

        Greater certainty of Contractor contributions as a flat contribution rate was given at the start of the contract.

In concluding, Douglas Green stated that Hymans Robertson deemed that the benefits of the pass-through policy outweighed the potential risks. Given that the proposed policy would become the default for outsourced contracts if recommended by the Committee and approved the General Purposes Committee, members were further informed regarding the practical implementation of the policy, which is detailed below:

•         Default pass-through would apply to all Contractors with fewer than 15 transferring members. For new Contractors with 15 or more transferring members, the Administering Authority would agree the most suitable arrangement with the Letting Authority.

•         The Letting Authority retained all risks, except for those brought on by the contractor, such as the award of unreduced early retirement unrelated to ill-health.

•         The contribution rate would always be set equal to the in-force primary rate of the Letting Authority, which could change at each triennial valuation.

•         A bond could be inserted for “high-risk” contracts at the Fund’s discretion or if required by the Letting Authority.

•         Liabilities (with corresponding fully funded assets) would be assigned to the Contractor and tracked for their period of participation. However, for funding and accounting purposes, the Contractor assets and liabilities would be pooled with the Letting Authority.

Following the overview of the pass-through policy, the Chair welcomed questions from the Committee. Questions and responses are summarised below:

•         Regarding whether there was a precedent for the pass-through policy, members were advised that the majority of pension funds were now using pass-through to some extent, with academy schools being the single biggest driver for the increased use of pass-through as the Department for Education (DfE) had recently extended their Academy Guarantee to cover pass-through which meant that the Fund could claim expenses back from the DfE if an academy were to cease operating.

•         In response to a question relating to the impact of the policy for Brent, it was detailed that contracts were likely to be cheaper given the reduced risk borne by Contractors. Additionally, officer time would be saved which in turn resulted in cost-savings and employer contributions could be received sooner due to no longer needing to determine contribution rates, bonds and cessation fees. Furthermore, the Committee heard that it was best to view the pass-through policy as sharing the risk between the Letting Authority and Contractor, with risk being retained by the Letting Authority rather than increased as the Letting Authority would bear the risk if the employees remained within the Letting Authority anyway.

•         In explaining the arrangements for employees when contracts expired, the Committee noted that if the contract was not re-let the employees would return the Letting Authority, which occurred already and therefore there was no change in process. Moreover, if the contract was re-let the Fund would arrange for the employees to move to the new Contractor under the new policy.

•         Concerning the contribution rates of Contractors, the Committee was informed that contribution rates were currently bespoke for every contractor which resulted in expensive consultation fees and slow processing times. However, under pass-through the contribution rate was pegged to the contribution rate of the Letting Authority, whether that be the Council or a school. At the end of the contract, if the contract was re-tendered, the new Contractor would pay the same contribution rate of the Letting Authority at the time of the award of the contract.

•         Members were reassured that regardless of the contribution rate of Contractors, members’ pension benefits were not impacted.

•         In clarifying the requirement for legal advice outlined in the next steps, it was detailed that officers were satisfied with the general approach of pass-through, but if the policy was to be approved by the General Purposes Committee, officers would seek legal advice to finalise the details of the policy. In reassuring members, officers explained that conversations had occurred with colleagues in other boroughs where pass-through was widely adopted, in which they expressed satisfaction with the policy.

•         Following approval by the General Purposes Committee, the Committee noted that the Fund would be contacting all employers (Letting Authorities) to explain the benefits, risks and key differences between pass-through and the ‘traditional’ approach currently used.

With members happy with the proposed pass-through policy, the Committee RESOLVED to:

(1)      Note that the proposed pass-through approach would be the default for admission agreements in line with the principles as specified in the report.

(2)      Recommend that the proposed pass-through approach, detailed in section 2.1 of the report, is approved by the General Purposes Committee at its next meeting.