Pensions are on many public managers' minds, particularly those involved with potential social enterprises that are about to "step out" of the public sector.
For some of these, pensions are a big headache.
There are several public sector schemes, each a little different, but all have three things in common. One is that they are a "defined benefit" – you get a proportion of your final salary linked to inflation. The second is that the employer (the state) contributes up to 20% of the employees' salary – much more than is now usual in other sectors (0%-6% is fairly common). The third is that most schemes are in deficit – meaning that the payouts are not covered by those paying in. The bill for this is picked up by HM Treasury, and the most recent official estimate of the total cost of these unfunded liabilities is £770bn.
All this is highly relevant for the divestment of public services to social enterprises and the third sector. If the government insists that former public sector workers are offered a "broadly comparable" pension once they move into these new bodies, then we have a potential show-stopper on our hands. Taking on these pension commitments creates a huge obligation for the third sector.
I spoke recently to a chief executive in the third sector who had received a bill for £360,000 from the local authority pension scheme for four members of staff the charity had taken on from the public sector a few years earlier. The bill reflected a deficit in those employees' pensions that had built up over the whole of their employment with the local authority, not just the three or so years with their new employer. The deficit had, in effect, been dumped on the charity. Just imagine the damage this causes to a medium-sized charity. And this is aside from the resentment felt by other employees in the same organisation, who do not have these kinds of deals.
Any charity today looking at taking on state services may therefore face a local authority insisting it took on responsibility for funding staff pensions.
This is why the third sector and new social enterprises have to read the small print on pension deals. The handling of long-term pension liabilities is absolutely critical.
Lord Hutton's forthcoming review of pensions is a one-off opportunity to deal with this imbalance between public section pensions and those in other sectors. Most observers are confident that Hutton will raise the employee contribution. But it is unclear whether he will recommend the abolition of the Treasury's Fair Deal guidelines. If he did, it would enable social enterprises and third sector organisations to move new staff out of public sector schemes and into money-purchase schemes, and to pay pensions at existing charity levels, usually about 6%, without generating future liabilities.
It would also mean that all employees in an organisation would be on a similar deal, which is better for workforce morale. Former public sector employees would still be on a slightly better deal than existing staff, however, because the transfer regulations, Tupe, would give them more favourable sick pay and other benefits. But the really big differences created by the pensions gap would be eliminated.
Some charities have reached an understanding with public sector bodies so that staff moving out of the public sector will stay in their existing pension scheme under "approved provider" arrangements. This will often be underpinned by a short to medium-term commitment from commissioners to meet the costs of the pension scheme, now and in the future. But this is only useful for as long as commissioners can afford to pay. Once this ceases to become the case, it automatically becomes the charity's problem too.
Better to avoid that by seeking to get people coming out of the public sector on to money-purchase schemes as soon as they leave state employment. Let's hope Hutton's review allows this to happen.