Guidance

DfE local government pension scheme guarantee for academy trusts: pensions policy for outsourcing arrangements

Updated 7 May 2024

Applies to England

Local Government Pension Scheme (LGPS)

LGPS is a public sector, defined benefit pension scheme. As a defined benefit pension scheme, members are assured a certain level of pension benefits when they retire, based on salary and years contributed. Members are protected by law. LGPS is a funded scheme, with contributions made by employers, employees, and returns on investments made, which are used to finance pension benefit payments.

An academy proprietor (the company which runs the academy, known as the academy trust) automatically becomes a scheme employer under the LGPS Regulations 2013. This means that all non-teaching staff employed by the academy trust are entitled to membership of the LGPS, and academy trusts must provide access to all eligible employees throughout their employment with the academy trust.

DfE LGPS Guarantee for academy trusts

In July 2013 a Departmental Guarantee was put in place to provide an assurance to LGPS administering authorities that academies should not be treated as ‘high-risk’ employers, and should be treated equitably with local authority maintained schools. The Guarantee ensures that in the event of the closure of an academy trust, any outstanding LGPS liabilities will not revert to the fund. LGPS cessation liabilities become due when an employer has no active members contributing to the pension fund.

What is outsourcing?

The term ‘outsourcing’ refers to when a business seeks to obtain goods or services from an external supplier. In the academy sector, outsourcing is where an academy enters into a contract with a third-party provider to deliver services, such as catering and cleaning, to the academy trust.

DfE outsourcing policy

The DfE Academy Trust LGPS Guarantee policy provides pension liability cover where academy trust employees, who are eligible to be members of the LGPS, are transferred under Transfer of Undertakings Protection of Employment (TUPE) Regulations 2006 from the public sector to the contracting employer.

Academy trusts can enter ‘pass-through’ arrangements for all employees who remain eligible for access to LGPS. A pass-through contract allows LGPS liabilities to remain with the academy trust, for those employees who transferred to the outsourcing provider. Therefore, their LGPS liabilities are automatically covered within the DfE Guarantee.

What is a pass-through arrangement

A pass-through arrangement is a contractual agreement between an academy trust and their chosen service provider in which the academy and the contractor will agree the allocation of LGPS costs between both parties. In all pass-through arrangements, the trust must remain responsible for the pension liabilities of the LGPS members in the arrangement. 

Whilst the funding risks will remain with the academy trust, allocation of some costs may vary. For example, a typical case would see the contractor responsible for agreed monthly contributions, and other costs that they directly control, such as early retirement on redundancy, and higher than assumed pay increases. 

The DfE LGPS Academy Guarantee covers academy trust pass-through arrangements.

Who is covered under the DfE Guarantee when an academy is outsourcing services

Our DfE Academy Trust LGPS Guarantee policy covers three distinct groups:

• Employees eligible for LGPS who are working for the academy trust, who are transferred to a contractor or on future re-tenders as part of an outsourcing contract.

• Employees eligible for LGPS who were working for the local authority in a maintained school, then transferred to a contractor under TUPE, prior to the school becoming an academy, and where the outsourcing contract has passed to the academy trust following conversion to an academy.

• Employees eligible for LGPS who are working for the local authority, which is providing services to the academy trust under a contract, and the trust decides to outsource this contract to a third-party provider. Therefore, the employees transfer from the local authority to the new contractor.

Actions for academy trusts

Academy trusts should engage with their LGPS Fund at the start of any tendering process which involves TUPE transfer of employees with protected entitlement to LGPS.

ESFA approval is no longer required by academy trusts seeking pass-through arrangements with their LGPS funds for outsourcing contracts for employees covered by the DfE Guarantee policy, provided that the employee is from one of the three groups detailed above.

If the circumstances of an outsourcing contract are not covered in this policy document, then the academy trust must contact ESFA using the Education and Skills Funding Agency enquiry form and provide further information regarding the proposed arrangement.

Key points

• Provided that the circumstances of an outsourcing contract match one or more of the scenarios outlined in this policy document then the academy trust does not need to seek ESFA approval for pass-through arrangements.

• If the circumstances of an outsourcing contract are not covered in this policy document, then the academy trust must contact ESFA using the Education and Skills Funding Agency enquiry form.

• All contracting arrangements currently in place that meet the criteria outlined in this policy document are eligible for pass-through under the DfE Guarantee.

• Where academy trusts have already entered arrangements that do not meet the criteria outlined in this policy document, then they may discuss alternative options with the relevant pension fund.

• Under a pass-through arrangement, if the contractor external to the academy trust ceases to trade, then the LGPS liabilities will remain with the trust. The trust may then choose to seek a new provider or bring services in-house.

• This policy means that a pension fund should no longer require a bond for pension liabilities. However, if the pension fund insists on a bond, then that would be for the external contractor to provide, as an academy trust cannot provide a bond for LGPS pension liabilities. In such circumstances, academy trusts should notify ESFA through the Education and Skills Funding Agency enquiry form.

Guidance for LGPS administering authorities

Provided that the conditions in this policy document are met, pension funds do not need to request evidence of ESFA approval for pass-through arrangements.