Businesses are being put off bidding for public service contracts by the need to mirror costly public sector pensions when staff are transferred from the public sector to the private, the CBI warned on Tuesday.

Firms have to pay anything between 25% and 50% of salary to fund the pensions of ex public sector staff, leaving many unable to compete against a public sector employer, who typically contribute around 15%.

The private sector has to factor in a 'worst-case scenario' to cover the unlimited risk and huge liabilities of these 'final salary' pensions, ultimately pushing up the costs of public services and leaving the taxpayer with a poor deal.

Consequently, many businesses are avoiding contracts that involve staff transfer at a time of critical opportunity for public service reform, which has worrying implications for innovation and value for money in services such as the NHS, prison services, and the Flexible New Deal.

Kevin Beeston, Chairman of the CBI Public Services Strategy Board, said:

"The government policy whereby transferred staff retain their defined benefit 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.

"We are not looking for special treatment or a hand-out from the government, but we are asking for realism and a simple and fair means of levelling the playing field."

The CBI's key solution is that staff transferred to a private contractor are able to retain membership of their public sector scheme, with the private employer paying into that scheme at the same level that a public sector provider would. Outsourced contracts vary greatly in duration but typically run from five to 10 years. The private employer would become what the CBI has termed a Public Sector Participating Employer.

A similar system for local government employees, known as the Admitted Body Status scheme, is already proving largely successful and sets out what pensions responsibilities are before, during and after the contract, which gives both parties the confidence they need. The CBI would like to see this approach spread across the public sector.

John Cridland, CBI Deputy Director-General, said:

"Government finances are in a woeful state, public services are inevitably going to be squeezed, and there's an urgent need to deliver greater value for money. The private sector has a strong track record of improving public services, but too many firms are being shut out by the huge financial risk of trying to replicate public sector pensions.

"Private bidders recognise the importance of pensions, but they cannot expose themselves to the ballooning costs of these public sector schemes, especially when so many businesses have had to cut their own final salary schemes.

"Recent legislation has worsened the situation for those bidding for NHS services, and a solution must be found quickly, especially with the strain on health spending.

"Our suggestion to allow private firms to pay into public sector pension schemes would bring much needed transparency and greater equity to the tendering process. It would allow bidders to compete on innovation and service quality, rather than their ability to manage pensions costs."

The CBI also calls for the Government Actuary's Department to use realistic assumptions on, for example, life expectancy and investment returns in calculating the contributions needed from employees and employers, whether from the public or private sector.

These issues of high costs, a lack of transparency and question marks over sustainability also apply to all defined benefit 'final salary' public sector pensions schemes in general, and their effect on the wider economy.

The CBI estimates that public sector pensions are running up a £trillion bill and, since there is no funding set aside for the vast majority of schemes, this huge burden will fall on the taxpayer - including the business community - and future generations.

Previously unreleased figures drawn from the CBI's Public Services Survey show that 89% of business respondents do not think that public sector pensions are affordable in the long term. And 92% think whoever wins the next general election should immediately tackle public sector pensions.

"Public sector pensions continue to be an emotive issue across the business community, warned John Cridland. "The government needs to set up an independent commission to fully assess the current costs and affordability of future liabilities. Political discomfort can no longer be allowed to stand in the way of public interest."

The unions are even in agreement. GMB Public Services union Brian Strutton National Secretary said: “Unions and business now agree: successful bids should be on the basis of greater efficiency or innovative service delivery, not slashing costs at the expense of the workforce and quality of service. While there are genuine issues to be discussed in terms of certainty of costs for pension provision for contractors, this should not be a green light for profiteering. Taking pensions out of the outsourcing equation makes the bidding process fair for bidders and will provide much needed security for these privatised workers."

However, the congratulations come with a warning:

"Of course, taking pensions out of the bear pit of public sector outsourcing means ensuring everyone working on the contracts is able to participate in the relevant public sector scheme: transferring workers and new starters," said Brian Strutton. "No contractor should be able to underbid and profit by hiring new workers on inferior terms and conditions. Reputable contractors and in-house bidders who provide open access to the Local Government Pension Scheme should not be disadvantaged from doing so; they should be encouraged as showing a genuine commitment to a sustainable public service. If contractors want the government to introduce cost pass through; then logically they should insist the schemes are open to new starters."

www.cbi.org.uk
www.gmb.org.uk