UK - The government needs to “level the playing field” and stop private sector companies having to pay up to three times as much in pension costs than the public sector following staff transfers, the Confederation of British Industry (CBI) has warned.
In its report entitled ‘A question of balance: Reforming pensions practice in public services contracting’, the CBI claimed significantly higher pension costs are deterring private sector and independent companies from bidding for public sector contracts.
It said when a public sector employee is transferred to the private sector, firms, on average, have to provide equivalent pension benefits which could cost firms between 25-50% of salary while public sector employers typically contribute around 15%.
Kevin Beeston, chairman of the CBI public services strategy board, warned that this uneven playing field is “technically the most important area of concern”, as it is “something like a 20% immediate obstacle” to employing the same individual with the same salary.
The CBI argued the government is not “properly costing pensions to the public sector” in the same way that private companies are required to do so.
“The government policy whereby transferred staff retain their defined benefit (DB) pensions, and the optimistic funding assumptions behind this, have unfortunately created unfair competition between public and private sector providers. Some companies have now stopped bidding for contracts involving staff transfers,” said Beeston.
In particular, he suggested smaller companies face the biggest impact as they “can’t take on the risk of providing very generous, unfunded schemes and find the efficiencies to meet those costs”, making pension benefits the “most effective barrier to competition”.
To tackle the immediate problem, the CBI is recommending that transferring employees should stay in their existing local government pension scheme, while the private sector and independent firms should be given ‘admitted body status’ and be allowed to pay the same contributions to the scheme as the previous public sector employer.
John Cridland, deputy director general of the CBI, said: “This issue needs urgent action, and the government needs to face up to the real costs of its pension and not ask the private sector to pay costs the public sector doesn’t bear.”
He added the CBI “simply want a level playing field so staff can be transferred,” although he admitted in the long-term the government needs to be more transparent about public sector pensions as a whole, as 90% of member firms believe public sector liabilities, valued at £1trn (€1.14trn), will be unaffordable in the long-term.
The CBI suggested that allowing transferred staff to stay in public sector schemes be considered as an “interim step” to allow competition to develop earlier, as it highlighted instances of private sector companies being awarded contracts and having to withdraw and processes renegotiated over the pension costs issue.
It also recommended in the report that protective bonds - required by some public sector contracts in order for private sector companies to gain ABS status to a pension scheme - “should only be used in exceptional circumstances”.
It argued contractors are effectively being asked to put up a bond to cover it if the company fails but the approach used by local authorities differs across the country and the level of bond changes. One case study in the report highlighted a catering services contract where the private firm would have to supply a bond for £127,000 equivalent to 60% of the pay bill.
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