Terry Crossley argues that the lack of any regulatory framework governing the working relationship between administering authorities and their pools remains a threat to the future of the LGPS.
It is inconceivable that those responsible for designing the 1922 Local Government Superannuation Scheme could have envisaged the current format of the Local Government Pension Scheme (LGPS). The provision of pensions for local government then was related to terms and conditions of local employment, whereas the increasingly-centralised current framework is the outcome of coalition politics, issues of command and control, optimistic efficiency savings and standardised nationally based benefits.
Currently, the emerging investment pools of the LGPS in England and Wales are essentially adjuncts to the scheme. Chris Buss, in his analysis for Room151, pointed out that pools were created for the sole purpose of serving the needs of their member funds and are not there for their own self-justification. In essence, the pools are servants of the funds.
In what is undoubtedly regarded as an act of policy, the statutory-based, local political stewardship of the scheme is being challenged by the newly created pools, beyond the traditional framework of the scheme. Many believe that is deliberately intended to widen the gulf between local democratic responsibility for fund stewardship, and pools’ specialist investment role. It is seen as a key step towards ultimately eradicating council influence in the investment management of LGPS assets.
The key issues for the LGPS for some time have been its on-going affordability, viability and its fairness to local taxpayers who ultimately are financially liable. Whereas Hutton delivered a range of recommendations for reform to ensure these objectives, the real prize was the Public Service Pensions Act 2013. This allows HM Treasury, for the first time, to gain direct ministerial control of MHCLG policy and legislation for the LGPS.
However, of even greater significance perhaps was the subsequent 2016 secondary legislation governing the management and investment of LGPS assets. At a time of austerity and scarce public resources for investment, the temptation to influence fund management was too great. This led to a form of direct rule being imposed on the LGPS by the government’s pooling timetable and the direction threat in the 2016 regulations.
While this step appears to threaten the very foundations of the scheme as a local entity, the more substantive risk created by pooling funds in such an overtly political manner is that operational investment risk is now outsourced to unelected bodies, unaccountable to council tax payers who carry the ultimate liability risks. It is only through investment strategy statements that any formal conduit exists between fund authorities and pools.
The deliberate lack of any regulatory framework governing the working relationship between administering authorities and their pools remains an underlying threat to the future of the scheme. Urgent measures are needed to prevent serious functional and competency fissures developing between administering authorities and their respective pools.
The primacy of administering authorities needs to be explicitly enhanced, and their supervisory and governance roles in relation to their constituent pools urgently clarified. Specific secondary legislation might well be needed. A failure to do so opens up the possibility of demise in status and function, a consequential loss of local political control and accountability, leading ultimately to potential de-funding.
The following steps could help to sustain a fresh approach and stave off loss of responsibilities and possible future radical change:
—the SAB should ask MHCLG to urgently clarify the statutory role of administering authorities in the LGPS and how this relates to the established pools now in place;
—administering authorities should revisit and review their governance and monitoring responsibilities for their pools and adopt the guidance produced by CIPFA. There is no substitute for effective scrutiny and compliance checks on pool performance. Monitoring of outcomes delivering investment strategy statements is a prime duty of administering authorities, as will be their interest in seeing efficiency savings being achieved by their pools;
—administering authorities should be reminded by ministers of their over-arching stewardship responsibilities for the LGPS, of the importance of ensuring that their relevant pools contribute to the on-going affordability and viability of the scheme, and that council taxpayers are protected. The SAB has a key role to play in achieving this action;
—administering authorities need to ensure that appropriate capacity and competencies exists within their LGPS teams to engage effectively with pools. The recent dilution of skills in fund authorities due to officer transfers must be counterbalanced, otherwise a loss of primacy will follow. There is a role for CIPFA in this activity; and
—elected members should also ensure their pension and investment skills are up to date in order to mount an appropriate level of authoritative challenge when monitoring pool performance and compliance with the relevant regulations.
Terry Crossley is an LGPS consultant.
