WESSEX EDUCATION SHARED SERVICES
Briefing Paper: Local Government
Pensions in a Cost Share Group
Company
Introduction
This briefing paper outlines how Wessex Education Shared Services (WESS) identified and overcame
a number of challenges around the preservation of employee membership in the Local Government
Pension Scheme (LGPS) on transfer into the shared services company.
The paper is not intended to be a substitute for expert legal advice but will, it is hoped, help other
projects, especially those operating as cost sharing group entities, to move more quickly towards
identifying and resolving similar issues.
WESS would like to acknowledge with gratitude the expert advice and guidance provided by Rebecca
Cooke of Wrigleys LLP throughout the pensions journey.
Background - About WESS







WESS is the product of a project undertaken by the Wessex Colleges Partnership during 2011-13
with support from the Skills Funding Agency and the Association of Colleges (AoC)
WESS is a private Company Limited by Guarantee; it is owned in equal proportion by its Member
colleges of which it is an associate company (importantly, WESS is not an arms-length subsidiary
of its Member colleges)
Each College Principal is a Director of the Company
WESS is established as a Cost Share Group (CSG) as detailed in HMRC Briefing 23-12 in order to
benefit from the VAT exemption introduced in the Finance Act 2012
WESS provides business support services, at cost, to its Members across a range of areas
including finance, HR, payroll, student records, MIS, examinations, procurement and software
systems development
The first WESS employees were transferred from their former College employment under a
Transfer of Undertakings/Protection of Employment (TUPE) process in summer 2013
WESS operations span several county boundaries (Dorset, Hampshire, and potentially Somerset)
and employees are in different LGPS Funds.
Context
At the outset it should be noted that the WESS Cost Sharing Group arrangement does not come
within the "Fair Deal" principles (see http://timeline.lge.gov.uk/ for information), so the options
open to the project team as to what pension provision would be available to transferring employees
were wide.
1
WESSEX EDUCATION SHARED SERVICES
However, it was agreed by the Principals’ Steering Group early in the planning for the shared
services joint venture that every effort would be made to enable transferring employees to continue
their membership in a defined benefit pension scheme. This decision was taken in order to improve
the retention of knowledge and expertise, avoid disadvantaging transferring employees compared to
others remaining in the direct employment of the colleges, and to help ensure the continuity of the
services that were to be relocated from the individual colleges. Business support services employees
in the Colleges were, in the main, members of the LGPS.
As noted above, the project spanned several county boundaries (Dorset, Hampshire, and Somerset)
and, accordingly, several LGPS Funds. LGPS Funds are independent entities. They set their own
employer contribution rates (whereas employee rates are standardised nationally) and may be
structured in different ways (e.g. in the Hampshire LGPS Fund the FE Colleges are pooled with a
single employer contribution rate set for the whole pool; meanwhile in the Dorset Fund contribution
rates are set by the appointed actuary based on the calculated deficit for each body).
A key concern that the project group was mindful of throughout the planning and consultation for
creation of the company was the risk that precedents might be set that could subsequently hamper
other partnerships and projects.
Working with the LGPS Funds
A dialogue was begun between solicitors acting for the Wessex Colleges Partnership (Wrigleys LLP)
and those acting for the Pension Funds in Hampshire, Dorset and Somerset in the summer of 2012
when the project entered its implementation phase. A range of questions were posed and were
progressively worked through by the legal teams over the course of the following twelve months.
1. Can WESS be an employer in the LGPS?
It was readily established that the proposed ownership and control by the colleges of the planned
shared services company would automatically enable WESS to be an employer in the relevant LGPS
Fund(s). Colleges are listed in Schedule 2 Part 1 of the LGPS Regulations. Entities controlled by Part 1
bodies are listed under Part 2.
2. Which Administering Fund, or more than one Fund?
Because WESS operations may cross three different LGPS Fund administrative areas, a question
naturally arose as to whether WESS could deal with a single fund (preferable from a payroll
administration perspective) or would have to deal with two or more funds (increasing the potential
administrative burden). Given the location of WESS Head Office, Dorset might logically be
interpreted as the appropriate administering fund (which would reflect, in part, the way admitted
bodies are treated in the LGPS). However, it was eventually concluded that WESS would continue to
deal with the current three LGPS Funds for the following reasons:
Paragraph 1 of Part 1 of Schedule 4 of the Administration Regulations provides that "the appropriate
fund for a member is the fund specified in column 2 of the following Table for a member of his
description". According to paragraph 5 of the Table in Schedule 4, the appropriate fund in column 2
of the Table for "an employee of a company under the control of a Scheme employer specified in
2
WESSEX EDUCATION SHARED SERVICES
Schedule 2" (e.g. an employee of the New Company) is "the Fund which is the appropriate fund for
employees of that Scheme employer". This is subject to paragraph 2 of Part 1 of Schedule 4 which
provides that the Secretary of State may direct which fund is the appropriate fund for members
falling under paragraph 5.
So, although it was possible for WESS to apply directly to the Secretary of State for a Direction as to
which Fund should administer its scheme, WESS recognised potential advantages to enabling
employees already in the Hampshire Fund to remain within the FE colleges pool (described above)
operated by this fund.
While the funds debated the implications of one acquiring the other’s employees (and liabilities),
employees going through consultation around the proposed TUPE transfer were understandably
nervous about what implications there may be if their pension fund were to change.
3. Is WESS an outsourcing arrangement?
As highlighted at the beginning of this note, it should be recognised that the Cost Sharing Group
proposals did not fall within Fair Deal. However, this question arose because each of the LGPS Funds
had previous experience, notably in the local authority sector, dealing with circumstances in which
employees had been transferred out of public sector employment into private sector “outsource”
entities (most commonly arms-length subsidiaries or larger service providers). Inevitably the Funds
looked to these previous experiences for precedents in their treatment of WESS and found that
there was an increased risk that such employers would withdraw from the LGPS thereby creating
difficulties for the fund in relation to liabilities. The argument was made by WESS that a Cost Sharing
Group, a new type of entity that was introduced in the Finance Act of July 2012, should be treated as
a very special case given its direct ownership and control by the colleges. WESS believes that there
remains a disconnect between the expectations of Her Majesty’s Revenue and Customs (HMRC) for
operational control of a VAT-exempt CSG and the evaluation of risk by Funds and their actuaries in
relation to such entities. Cost Sharing Groups are not free, independent commercial entities.
4. Is a Parent Guarantee Required?
There is no legislative requirement for WESS to be backed by a parent organisation guarantee.
This question emerged initially as a subset of the previous question (as a way for the funds to
protect themselves from the perceived risk by retaining a direct relationship with the former
employing colleges) but led to a somewhat protracted debate between the lawyers. The nub of the
issue from WESS’s perspective was what the scope of any guarantee ought to be given that
employees would be transferring from more than one college into WESS. It would be inappropriate,
if not impossible, for any college to find itself individually or even severally liable, for an undefined
timespan, for all of the debts in the fund(s) for all of WESS’s employees.
Parent Guarantees are typically arranged where an organisation becomes a member of the LGPS
through what is called an Admission Body agreement. Common examples of admission bodies are
found in public sector outsourcing where a company may, at some stage in its history, have been in
the control of a local authority but subsequently became an independent entity. But such
3
WESSEX EDUCATION SHARED SERVICES
guarantees are not commonly demanded where the organisation is a designated body like WESS
(see question 1).
From a practical perspective it was recognised that the contribution rate is fixed by the respective
Fund Actuaries and they can take into account their own perception of the risk attached to any body
in the LGPS. Having received indicative actuarial rates for operating without a guarantee, it was
established that a parental guarantee would be required in order to make the contributions rates
more manageable for WESS.
Having established that it would be appropriate to have a parental guarantee the next question to
be addressed was who should it cover and what should its scope be. WESS sought advice from the
AoC about the potentially unlimited nature of the proposed parent guarantee that the funds initially
expected the colleges to provide. The matter was raised by AoC on behalf of the project with the
Department of Communities and Local Government (DCLG) Policy Review Group (PRG). Ultimately
the guarantee was only deemed workable if WESS operated a semi-closed scheme restricted only to
a specific class of employees who had transferred from a college under a TUPE arrangement.
As a footnote, there was also some interest from unions about what they perceived to be a loophole
in the rules for college subsidiary companies that might enable them to opt-out entirely from the
LGPS in order to avoid comparatively high, and uncertain, employer contribution rates compared
with similar jobs in other sectors. The early decision to maintain LGPS membership for transferring
college employees took the potential heat out of this area.
5. Will Employer Contribution Rates Increase?
If the number of members transferring under TUPE from an institution is 10 or more, then the
transfer will fall within the bulk transfer provisions in the LGPS Regulations and will be dealt with by
the relevant Fund actuaries who will assess new risks and set contribution rates. Most LGPS
members of the College still remain in College employment and the transferring employees were
only a subset of these.
The LGPS triennial review has been on-going concurrently with the creation of WESS, so although
the Fund actuaries have already indicated that employer contribution rates will increase from April
2014 it is unknown at present whether, and by what amount, these might vary from the Member
College rates.
It is also important for any project to understand all of the potential financial risks of being in the
LGPS (in addition to the ongoing contributions), in particular the risk of strain payments and/ or exit
debts that may arise, for example where, somewhere in the distant future, there are no more active
WESS employees in the LGPS. For WESS, it was also essential that these risks were recognised in the
Shared Services Framework Agreement with its members since potential debts would include former
service in the colleges, not just current service in WESS.
LGPS: The Reality in WESS
So what were the answers to all of these questions for WESS?
1. WESS is a designated schedule 2 part 2 employer in the LGPS.
4
WESSEX EDUCATION SHARED SERVICES
2. WESS has employees in both Dorset and Hampshire funds
o As expected this has resulted in some additional administrative burden on the payroll
and pensions team and has also necessitated preparation of multiple agreements,
guarantees and designations.
3. WESS operates a partially closed LGPS scheme which is only accessible to employees transferred
in to WESS under a TUPE process from a college
o WESS has designated (via a Designation Resolution made by its Directors) this class of
employees as being eligible for membership in the scheme.
o This was the only viable option under which the parent guarantee requirements could
be agreed and made acceptable to the funds and the colleges.
o The implication of this is that, at some point in the future, WESS may cease to have
active scheme members (which will be a trigger point for potential Exit Debt payments
under the parent guarantee).
o A partially closed scheme was not an ideal outcome from the union perspective who
would have preferred to see an open scheme accessible all employees.
4. A Guarantee has been provided by the Corporation of each of the Member colleges to back the
existing and future debt liabilities for their former employees
o It is important to be clear that although an employee may leave college or WESS
employment at some point in the future, the debt liability does not necessarily leave
with them (the debt only ends through a further TUPE transfer, on the employee’s
retirement, if the employee themself chooses to transfer their benefits out of the LGPS,
or when an exit debt is paid by the relevant employer).
5. WESS offers a defined contribution pension scheme for employees recruited directly to the
company or who have opted not to join the LGPS.
Lessons Learned
The pension’s negotiation was complex and it took significant dialogue over an extended period of
time to establish a way forward. Consequently it also cost rather more in fees (solicitors and
actuaries) than the project had estimated. It is hoped that this briefing note will help to save some
time and effort in establishing the options for your project. Some final points:


Cost Sharing Groups are new. Neither the Funds nor their Lawyers yet have a clear
appreciation of how CSGs are governed and structured. They have no prior experience on
which to base their evaluations of risk.
Fund Actuaries are likely to take every opportunity to review and revise (upwards) employer
contribution rates (even where risk has not obviously changed).
Finally: A footnote about the Teachers’ Pension Scheme
One of the managers who transferred to WESS was a member of the Teachers’ Pension Scheme
(TPS). It became apparent early on that, given the specific constitution of the TPS, a change in
primary legislation would be necessary for WESS to become a provider in the TPS. Given that such a
change could take some years to work through, this route was discounted and the employee given
the option to defer membership of the TPS and begin membership in LGPS instead prior to transfer.
5