Ministers are poised to launch one of the biggest experiments in public sector reform when they convert part of the work and pensions department into a John Lewis-style mutual – the first to be created in central government.

About 500 staff in the Department for Work and Pensions will quit the public sector in March and become stakeholders in MyCSP, a privately held company that will handle the retirement funds of 1.5m civil servants, disbursing £4bn ($6.3bn) in pension payments each year.

As the first piece of the government to be spun out into a profitmaking mutual, MyCSP is a trailblazer for the coalition, which has said that 1m public sector workers could be in share-owning partnerships by 2015.

Speaking to a group of MyCSP staff in Worthing last week ahead of the transition, Francis Maude, Cabinet Office minister, said: “It’s the first one in the UK and the UK is the first to look at this kind of model. So far the auspices are very good.”

Nick Clegg, the deputy prime minister, said earlier this month that he was “kick-starting a drive to get employee ownership into the bloodstream of the British economy”.

Although MyCSP will provide a template for other government spinoffs, Mr Maude said the formula might vary between mutuals. “I don’t take the view that this is the absolute model. We have learnt a lot of lessons and the next one should be easier to do.”

The Cabinet Office has set up an incubator unit – run by Stephen Kelly, the former chief executive of Micro Focus, a FTSE 250 software development company – which hopes to get at least three or four mutuals started this year. Groups of staff in probation, children’s services and further education are already considering spinning off their work.

Under the MyCSP model, profits will be shared between a private sector provider, which will hold a 42 per cent stake; the government, with 33 per cent; and employees, who will own 25 per cent of the shares. Royal Bank of Scotland, the bank that is 83 per cent state-owned, has agreed to handle banking for the group while a shortlist of 16 private sector providers has been narrowed to four – Xafinity, Capita, JLT and Wipro – with the winner due to be announced next month.

In a nod to the row over senior executive pay , the chief executive’s compensation will be capped at 8 per cent above the average employee’s salary while 1 per cent of net profits will be paid to charities and a further 1 per cent used to create apprenticeships.

The plan has faced substantial opposition from staff, including the PCS, the civil service union, which believes that mutualisation is privatisation by the back door and that when contracts come up for tender again mutuals could lose out to private-sector companies. A short walkout was held in July while an overtime ban is in place.

Clive Bryant, PCS branch secretary in Worthing, said staff would have no real say in the running of the company as they were represented on a shareholder trust by a professional, experienced director, whose position would be advertised, rather than a staff member. The director, advised by employees, would influence decisions over bonuses and charities but would have no control over company strategy. “In reality staff will have an arms-length relationship,” he said. “It’s not as if this is a workers co-op.”

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