Capita (CPI) as reported by the IC late last week

The UK’s largest outsourcing groups have historically shrugged off high-profile public sector failures as fresh government contracts kept flowing. Capita’s (CPI) mishandling of the Civil Service Pension Scheme (CSPS), however, is starting to look like more than just another bump in the road.

Just a couple of months after taking over the pension scheme in December, Capita called in the government, which provided hundreds of additional staff to tackle a growing backlog of around 120,000 unresolved cases. The situation has left some former civil servants unable to access their pensions, including terminally ill members who died before receiving their payouts.

Capita has since come under fire from MPs and ministers, who have blocked payments after the company missed several improvement deadlines and failed to deliver promised technology upgrades.

UK paymaster general Nick Thomas-Symonds is also demanding that the company foot the government’s £12.5mn emergency response bill.

The financial toll on the outsourcer is mounting. Capita warned investors last week that remediation efforts and additional technology investment would wipe £25mn to £40mn off its 2026 adjusted operating profit. The cash flow hit of up to £50mn also pushes its target for positive free cash flow back to 2027.

At a parliamentary committee hearing last week, Capita’s chief executive, Adolfo Hernandez, apologised for the “poor service”, admitting that the company “fell short” using automated services to tackle the backlog, despite inheriting more than 20mn missing or inaccurate data records. “This is a very complex scheme,” he said. “More complex than we thought, realistically.”

Political fallout

This is not Capita’s first high-profile government contract scandal. The difference this time, though, is that it has collided with a Labour government committed to ending “outsourcing by default”.

Thomas-Symonds said the CSPS contract was a “prime candidate” for insourcing, but that bringing it in-house immediately would have “catastrophic” consequences. 

Whitehall is now formalising its insourcing push. Under a new ‘public interest test’ being launched in April 2027, all expiring government contracts worth more than £1mn must be assessed to see whether they should be brought in-house, while departments with over £100mn in annual spending will be required to draw up five-year insourcing plans.

The Procurement Act 2023 also gives the government the power to ban poorly performing suppliers from winning public sector work. Asked if Capita could face a ban, government chief commercial officer Andrew Forzani said the threshold was high, but that “significant, sustained poor performance” falls within the definition of professional misconduct.

The reputational fallout is already having consequences for Capita. The Cabinet Office opted to bring the £563mn Learning Frameworks 2.0 contract in-house rather than award it to the outsourcer, as expected. Trade title Computer Weekly reported that the decision was a result of the CSPS disaster.

The government also terminated Capita’s contract to administer the Royal Mail pension scheme in April, with Thomas-Symonds stating that the cancellation was driven by “virtually every milestone” being missed and a “lack of confidence” in its ability to deliver the project on time.

Deutsche Bank analysts believe Capita’s “poorivery” is already having broader reputational and financial consequences that will “further delay any sustainable turnaround to the business”.

“Capita inherited a problematic contract, but it has not delivered what it promised its largest customer – the UK government,” they said last week.

Yet the political rhetoric has not translated into a collapse in government demand. When pressed on Capita’s portfolio of 85 government and public sector contracts, Forzani admitted that, alongside the civil service and teachers’ pension schemes, its expiring Army recruitment contract is the only other deal currently rated ‘red’ for poor performance.

The outsourcer secured contracts worth almost £1bn in the first half of 2026 – its strongest public sector sales performance since 2021 – including a £370mn, decade-long ‘Synergy’ business process services contract spanning multiple departments.

It also secured a role in the £2bn Army Collective Training Service programme earlier this week.

“Some experiences will have been pretty scarring for Capita, but the reality is that [it is] the market leader in large-scale, complex government projects,” said Richard Staveley, fund manager at shareholder Rockwood Strategic (RKW). “There isn’t really any evidence to suggest there’s a broader problem with Capita as a supplier of government services.”

He also warned that Labour’s insourcing agenda could backfire on taxpayers. “If you bring these services in-house, you’re basically saying you’ll save the profit margin that would have gone to the outsourcer,” he said. “But you have to be at least as efficient as the outsourcer’s profit margin for that to work. Otherwise you’re simply adding costs into the system.”

The break-up push

The CSPS fiasco has sent the company’s shares tumbling by more than 30 per cent over the past month, leaving the stock languishing around 240p, or just 5.7 times forward earnings. Yet, rather than fleeing the crisis, activist investors have been loading up on the cheap shares.

Activist shareholders now control more than 20 per cent of the company. This includes Hong Kong-based Oasis Management, which has quietly built a 15 per cent stake over the past six months and recently secured a board seat for its head of Europe, Daniel Wosner. Rockwood Strategic, managed by Harwood Capital, has now built a 5 per cent stake.

Investors’ Chronicle understands that both firms are pushing Capita’s board to sell off the troublesome pensions division. Rockwood’s Staveley said selling the pensions arm for between £200mn and £250mn would be enough to pay off the group’s debt, leaving a ‘pure-play’ government supplier worth around £1bn that could then also be put up for sale.

“The pensions business [...] has a diversified set of relatively small contracts. Quite a few people in the market would like to own those contracts,” he said, adding that new ownership and a rebrand could open the door for more contracts.

Without the burden of its debt and the distraction of the pensions division, Staveley argued that the market would be forced to re-rate the remaining public-sector business. “Just think about what the P&L looks like if you remove £30mn of interest expense,” he added. “On that basis, the shares should basically triple. We should be north of £7.”

Written by Simon Cawkwell, July 2026