The government made a U-turn on new legislation for Local Government Pension Scheme (LGPS) members, which would protect these workers from losing their pensions in Carillion-like cases.
The ministry of Housing, Communities and Local Government published last week its response to a consultation to introduce new rules that would guarantee local government workers would remain in the Local Government Pension Scheme even if they compulsorily transferred to an independent provider.
However, the government won't be introducing the new legislation, due to the complexity that it would add to the scheme administration.
With 5.3 million members, the Local Government Pension Scheme is administered locally through 101 regional pension funds, and has members in local government, education from primary to higher, police staff, the voluntary sector, environment agencies and private contractors.
Back in the 1990s, the government introduced rules to guarantee that contractors would provide comparable pension benefits to workers that were being transferred from the public sector.
However, with companies deciding to shut down their defined benefit (DB) schemes, the government introduced a new policy in 2014, called Fair Deal, which meant that central government workers could stay in their pension schemes even if they are transferred to a contractor.
The government has tried two times to extend this policy to the Local Government Pension Scheme, but it has reversed the decision each time.
Bart Huby, partner at consultant firm LCP, explained that in the past, a lot of contractors did take employees out and put them into their own schemes.
He said: "For example, Carillion has gone bust with quite a few employees in this type of scheme [which were previously in the public sector].”
Mr Huby argued that introducing the new Local Government Pension Scheme rules would have meant that this situation would not happen again.
He said: "By not introducing the new rules, the government has left it open for Carillion-type situations to happen in the future."
The defined benefit pension schemes of Carillion, one of the UK government's biggest contractors, are all either in the retirement fund of last resort, the Pension Protection Fund, or will soon enter it.
Carillion has 13 final salary schemes in the UK with more than 28,500 members, and a deficit of £587m at the end of July, according to the company's results.
After unsuccessful talks with its lenders and the UK government, Carillion went into compulsory liquidation on 15 January.
Carillion, which employed about 43,000 people, had been struggling for several months, issuing a profit warning last year that sank its share price – which fell from more than £2 a year ago to about 14.2p just before it went into administration.
According to Mr Huby, the situation is not as worrying as it was in the past, since many contractors have been able to negotiate with local authorities, and the local authority will be responsible for funding the pension benefits.
He added: "But it will have to be negotiated for each individual contract, rather than being the standard process."
The proposed rules, which were published in 2016, meant that each contractor would have been automatically given admitted body status to the scheme, which "has the potential to exacerbate the issues in the Local Government Pension Scheme associated with an increasing number of employers," the government stated.
Mr Huby said: "The Local Government Pension Scheme has thousands of employers now, because of these contracts, and it makes it quite complicated for their administrators to keep track of who is responsible for paying contributions for which employees.
"Probably making it a standard would mean that you would have more and more employers participating [in the pension scheme]."
Another difficulty of introducing the new legislation, when compared to applying it to the central government schemes, is that the Local Government Pension Scheme is comprised of funded schemes.
Mr Huby said: "In the Local Government Pension Scheme, someone needs to pay the contributions - it will either be the local authority or the contractor.
"For the central government schemes, which is unfunded, it all gets dealt with at a very high level with long-term taxation."
The government stated, however, that it remains "committed to introducing Fair Deal into the Local Government Pension Scheme and intend to commence a consultation on new proposals for achieving Fair Deal in the Local Government Pension Scheme by the end of the year".
maria.espadinha@ft.com
