This is a challenging time for LGPS. Funding pressures, consolidation, Tier 3 issues and investment pooling are all high on the agenda. When it comes to taking effective decisions and shaping the future direction of LGPS there needs to be confidence that these issues are being addressed independently and without conflicts of interest. However is this really the case?
LGPS are run as parts of a local authority and the key staff are Council employees. Usually the individual ultimately responsible for the delivery of scheme services is a senior executive or finance officer in the Council. Can these individuals discharge their duties to the scheme independently of their responsibilities to the Council and can Pension Managers do likewise when their ultimate line manager holds this position? How independent can these key people ultimately be when they are beholding to councillors in the local authority for agreeing budgeting and staffing levels? Would decisions in any way be swayed by these day to day concerns rather than the complete impartiality required on any decision they are taking?
Conflicts of interest are obvious so the key question must therefore be how well are they managed? The 7 principles in public life (‘the Nolan Principles’) require selflessness, integrity, objectivity, accountability, openness, honesty and leadership.
The Pension Regulator’s guidance on conflicts of interest in public service schemes (such as LGPS) focuses on potential conflicts of interest as a member of the pension board. Any such member must not have “a financial or other interest which is likely to prejudice a person’s exercise of functions.” It goes on to confirm that “actual conflicts cannot be managed, only potential conflicts.” Wider examples are given where senior staff may be conflicted.
The test is that the scheme manager must be satisfied.
Conflicts must be managed in 3 stages, namely identifying, monitoring and managing.
In practice however does this really fully address governance concerns. How seriously are Executives taking these conflicts, fully meeting the relevant Nolan principles and codes of conduct?
How might this impact on non Council participants in the Fund?
Information cannot be available to a Pension Fund Head as part of a negotiation and not to a Council FD if both are the same person! How can a Council FD claim to be detached from the policy in a Fund’s Funding Strategy Statement when they are the individual who has signed and issued it! How can a Fund be expected to robustly pursue a Council guarantee for an employer when it is the Council FD who is required to agree it and provide sign off? And yet from the schemes perspective it should be doing so to protect other employers.
This does not create an environment for challenge, growth and change but one which favours the status quo. There is little or no motivation to change historic practices and to innovate and this reflects the ponderous pace of change in schemes and their inability to reflect their employer and employee needs. This is also reflected in the myriad of local practices which have evolved in schemes over many years which do not bear close scrutiny. Schemes a short geographical distance apart can adopt wildly differing approaches to managing exactly the same issue.
I am not for a moment suggesting that decisions are deliberately being subject to bias but the potential is there for implicit bias, which is exactly what good governance and the necessary checks and balances are there to resolve.
The model operated by Local Pension Partnership covering a number of regions also provides offers some room for optimism as it has implemented the required additional independent governance tier and their approach has resulted in welcome levels of innovation and flexibility.
One of the options considered as part of the review of local government pension schemes in Scotland could provide a blueprint for change. The formation of a single Scottish LGPS operated independently from local authorities, which could be self-financing and run autonomously by a wholly independent board would provide complete independence and additional comfort that the required governance structure is in place and operating efficiently.
But how close are we to getting something like this more consistently? A long way off I suspect. There aren’t really similar discussions to those in Scotland on-going in England, Wales and Northern Ireland, and those in Scotland are some way from implementation. Why would Funds themselves be the turkeys voting for Christmas and push this change agenda earlier? Any impetus really needs to come from central government and have a reasonable timescale imposed if it is not to be subject to local / regional self-interest. Central government need to grasp the nettle here if financial savings are to be made and a more independent and consistent form of governance is to be achieved.