Craig Dearden-Phillips: Watch your back pocket when taking on pension-laden public sector staff

Charities considering hiring former public servants may find themselves out of pocket, says our columnist

Craig Dearden-Phillips
Craig Dearden-Phillips

If you are a charity thinking of taking on public services, watch your back. Or rather, watch your back pocket, because you might find yourself with huge pension liabilities for the former public servants who join you.

Not only might you be paying a 15 per cent employer contribution to their pension, as opposed to your standard 5 per cent, but you might also face a nasty bill for shortfalls in the public sector pension scheme of those employees.

Scare stories abound. I recently spoke to one chief executive whose charity took on a handful of public sector staff a few years back. Out of the blue one day came a bill for an unfunded pension shortfall for those few individuals of £400,000. What was once the problem of the government (and taxpayers) was now in the hands of the charity. Rightly, it has been termed 'deficit dumping'.

You get a better idea of the nature of the challenge facing charities when you look at the problem of public sector pensions in the round. Over the coming years, the government needs to find nearly £800bn to pay for unfunded public sector pensions.

In a time of record public debt, you don't need to be a genius to work out that, as part of creating a smaller state, there will be huge pressure to offload pension liabilities to third parties, such as charities and businesses.

So what can we do? The first thing is to be highly vigilant about the liabilities you take on for pensions. Get advice on the risks - and negotiate hard to push risk back across the table.

At the moment, it is tough for charities. Although pensions are not covered beyond statutory minimums by the Transfer of Undertakings (Protection of Employment) Regulations, there are still government guidelines - called, bizarrely, Fair Deal - that require comparable pension provision for transferred staff.

Help might be at hand, however.

The white knight of the moment is Baron Hutton of Furness, whose forthcoming review of public sector pensions will, many observers believe, raise employee contributions and close these schemes to new and younger staff.

But it is still unclear whether he will recommend the abolition of Fair Deal, which would allow charities legally to place former public sector staff in standard, more equitable money-purchase schemes immediately.

And we have no idea yet whether Hutton will advise the government to accept full liability for the pension shortfalls of transferred staff. The message is very clear: tread carefully, and make sure you watch your back.

Craig Dearden-Phillips is a social entrepreneur specialising in public service reform and a Liberal Democrat councillor in Suffolk

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