The Scheme Advisory Board (England & Wales) (SAB) has launched a review of LGPS governance in relation to administrating authorities and their pension funds. Jeff Houston explains the proposed changes.
The Local Government Pension Scheme operates its management and administration functions uniquely in the funded defined benefit pension space.
There are no trustees, no separate executive and no pot of money belonging to the employers and members of the scheme.
In the LGPS (England & Wales) the responsibility for the management of the scheme resides within 88 administering authorities who are also scheme employers.
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Each has a ‘pension fund’ which is actually a heavily ring-fenced revenue reserve of that authority, from which only pension benefit payments and administration costs relating to the funds can be paid.
There is, moreover, a silence in regulation with regard to whether a specific ‘fiduciary duty’ exists in relation to the pension fund and if so to whom such a duty applies.
This contrasts with the clear duty of trustees in the private sector to comply with statute, follow scheme rules and otherwise act in the best interests of scheme beneficiaries.
The duties of an administering authority are set out in regulation, which although comprehensive, do not clearly define in whose interests decisions should be made.
The fact that such a construct does not lead to problematic examples of conflicts of interest is testament to the professionalism and expertise of officers and the non-partisan, scheme focused approach of elected members.
However, as in all things, there is room for improvement.
In particular, the potential to provide those officers and elected members with
more effective support, guidance and, if necessary, statutory backing.
The scheme already faces many challenges to the efficient management and administration of the pensions function and this is unlikely to diminish over time.
For example, the number of scheme employers, the overwhelming majority being small, non-tax raising bodies, continues to grow apace.
This growth in the number and type of employers leads to greater challenges to effective and appropriate funding and investment strategies, employer engagement, and communication and consistency in the scope and quality of administration.
Local authorities with LGPS pension funds, despite such funds being ring-fenced in revenue terms, are not immune from the impact of austerity measures on local authority spending.
These are typified by constraints and restrictions on the recruitment and retention of experienced personnel and the development of the systems necessary for a complex multi-employer scheme.
Although scheme regulations permit such costs to be charged to the pension fund, in practical terms, the resources available to the pensions function can be subject to the overriding priorities of the parent local authority.
With the resources available to administering authorities continuing to diminish, the complexities of the new scheme, growth in numbers of employers, compliance with The Pensions Regulator standards on governance and administration, improving data quality and the challenge of pooling LGPS assets all add to the pressure on the scheme to remain effective and affordable into the future.
Difficult decisions around the funding, investment and administration of the scheme will continue to be required and those tasked such decisions deserve the support provided by appropriate, clear and effective guidance and regulation.
In 2015, a project (called separation) was put on hold while LGPS investment pooling was in its initial stages.
This earlier project, although not complete, had reached the conclusion that only by maintaining the strong link to democratic accountability provided by the involvement of elected members could the scheme’s statutory nature be effectively maintained.
For that reason, when the project was restarted, it was renamed in order to clarify that ‘separation’ from local authority control was no longer within its remit.
The SAB has asked pensions adviser Hymans Robertson to research the key issues impacting on the continued effectiveness of the scheme’s governance now and in the future.
In particular, where there appears to be an over reliance on the professionalism and experience of those involved due to the absence or lack of clarity in current guidance or regulation.
In doing so they will also identify examples of what works really well, both in the single administering authority model and the ‘joint committee’ model used by South Yorkshire.
Through the review process, SAB will be seeking the views of as many stakeholders, representing all elements of the LGPS, as possible.
Scheme stakeholders will be invited to complete a short online questionnaire which asks for views on potential conflicts that could arise, the effectiveness of current LGPS governance arrangements in managing such conflicts and suggestions for improvement.
Further stages of the review will include interviews and workshops with key stakeholders.
This will allow the SAB to consider a series of options to better support the elected members and officers tasked with the management and administration of the LGPS.
An interim report is due to be presented to the April meeting of the SAB, with a full report following in July.
Hymans Robertson will be in touch with stakeholders in due course with further details of the project including information on how to complete the questionnaire and further engagement plans.
More information can be found on the SAB website: http://www.lgpsboard.org/
Jeff Houston is secretary of the SAB
