Pensions in the context of outsourcing can give rise to complex and potentially costly issues. Currently no special pension rules apply to public sector outsourcing, but it may be that future legislative changes, any legislation setting up the public body in question (or its pension scheme) or pursuant to which a given outsourcing is to be concluded contains special terms and conditions in respect of transferring employees’ entitlements and the obligations of the service provider under the outsourcing contract.
Outlined below are 8 key pensions issues which should be considered in the context of any public sector outsourcing.
1. Due Diligence – It will be necessary to carry out careful due diligence to establish the issues and, in particular, the risk of any retirement or other rights transferring. The due diligence process should extend to previous acquisitions.
2. Minimum Requirements – If the transferring employees have no contractual or statutory entitlement to membership of a pension scheme or to pension benefits of a given type or at a particular level, currently the only obligation imposed on the service provider under Irish law is to provide the transferring employees with access to an occupational pension scheme or a personal retirement savings account (PRSA) post-transfer. It is therefore a commercial decision as to what pension arrangements will be put in place for transferring employees.
As the Irish Government’s intention is to introduce auto-enrolment in the coming years, which would impact on the minimum requirements referred to above, it will be important to monitor such developments.
3. Disability Benefits – Pursuant to the European Communities (Protection of Employees on Transfer of Undertakings) Regulations 2003 (the Transfer Regulations) disability benefits to which the transferring employees were entitled pre-transfer must be replicated by the service provider post-transfer.
4. Contractual Entitlements – Contractual entitlements of transferring employees to pension or death benefits which exist independent of, or in parallel with, entitlements under an occupational pension scheme must be replicated by the service provider post-transfer. While written contracts should be examined in detail, consideration will also need to be given to contractual rights that may arise outside of the employment contract itself, such as under individual letters or custom and practice.
5. Beckmann and Martin Rights – Under the Transfer Regulations, very broadly, the transferee is not obliged to replicate pension and death benefits provided to employees under an occupational pension or death benefit scheme. However, there have been a number of EU and UK cases which have examined what is meant by this derogation. This is a very unclear area of the law but, at a general level, some benefits which are provided under an occupational pension scheme, notwithstanding the derogation in the Transfer Regulations, will pass under the Transfer Regulations and have to be provided by the service provider. These rights are colloquially referred to as Beckmann and Martin rights (after the particular cases), and may arise, for example, in the context of a bridging pension or early retirement rights.
6. Statutory Entitlements – As the public sector employment relationship and pre-transfer employing entity (and also the applicable pension scheme) are often established and regulated by statute, it is necessary to review any relevant legislation in order to determine whether any unusual provisions or entitlements arise. This may be particularly difficult where the pension scheme is documented under obscure circulars (as often appears to be the case).
7. Industrial Relations Issues – In considering any outsourcing contract it will be necessary to understand, at an early stage, what the client’s, transferring employees’ and unions’ expectations are in relation to pensions. The level and type of benefits expected by the client may be of particular relevance in circumstances where the service provider is one of a number of parties bidding for the business being transferred.
We expect that unions representing employees in public service will focus on pension provision and are likely to be of the view that pension obligations should be replicated post-transfer. A commitment to include pensions as a condition of employment that would transfer had been part of the Towards 2016 National Pay Agreement, but this has not yet been implemented. This is another area of potential change which should be monitored.
8. Possible Options – There are a number of options available to deal with any issues identified. Which of these will be the most appropriate will depend on the issue identified, whether it is quantifiable in financial terms, the strength of the service provider’s negotiating position, the fee to be received by the service provider under the outsourcing contract and any industrial relations issues which may arise. The most difficult risks to deal with may be industrial relations risks.
Public sector outsourcing is common in other jurisdictions and we expect it will become more common in Ireland. Pensions issues can be key, both in maintaining good industrial relations and pricing a contract. Particular care will need to be taken in deciding what happens at the end of the contract.