Posts Tagged ‘LGPS Bulletin’

David Davison

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.

David Davison

I have highlighted the issue of legacy debt in LGPS in numerous previous bulletins, in numerous publications and at events. The whole issue is often met with some degree of disbelief. Rightly organisations question why should they be made responsible for pension liabilities which belong to someone else and why are public bodies taking the opportunity to avoid costs which are rightfully theirs.

Pension Funds and Councils are just choosing to avoid the issue and Government are just choosing to put it in the too difficult pile and ignore.

At the start of the year I issued an open letter to the Work & Pensions Committee to see if they would be prepared to raise the problem as the number of organisations I’m witnessing who are experiencing difficulties as a result of this issue has increased very significantly over the past number of months, I suspect as membership numbers in LGPS within charities continue to fall having closed schemes to new entrants.

I strongly believe that there is a potential tidal wave facing the charitable sector linked to this issue and the wider cessation debt regulation. Statistics compiled by Scottish Government back in 2014 for their schemes identified that of 422 admission bodies 223 had no guarantor. Of these 102 had fewer than 5 members and so were close to the point where they would have to manage a cessation.

Two LGPS Funds looked at the financial position in their schemes which showed that for organisations with 5 or less members the funding position moved from around £1.93m in surplus on an on-going basis to around £9.4m deficit on a cessation basis. This very much resonates with my experience and I suspect the gap has widened since 2014.

Based on these numbers I would expect that the position in England and Wales would be 8-10 times greater, so these issues could affect in the region of 2000 other charities and account for deficits approaching £80-£100m a material proportion of which relates to liabilities transitioned surreptitiously from local authority to unsuspecting charities.

A small number of LGPS have recognised the issue and made changes to deal with it but they are very much in the minority as the majority continue to stubbornly cling to the inequitable status quo.

Recent changes to the Scottish LGPS Regulations wholly ignored the issue and it was also studiously ignored by the Tier 3 review in England & Wales carried out towards the end of 2018.

The response from the Work & Pensions Committee has been positive and they have referred the matter to the Pensions Minister. I thank them for that. I will publish the letter and any response when it is received.

In the interim I would ask LGPS Funds to review this issue and to decide to ‘do the right thing’.

David Davison

In June 2018 the Scottish Local Government Pension Scheme Advisory Board launched a consultation on the future structure of the Scottish LGPS. The Board’s consultation sets out four options for the future structure of pension funds in Scotland. The review provides excellent background for all LGPS in the UK as the range of scheme sizes provides a microcosm in which to review the options presented more widely.

There are 11 Scottish Funds with total assets of around £42Bn and liabilities of about £55Bn. Scheme sizes range from the largest, Strathclyde Pension Fund, with around £20Bn of assets and 210,000 members to the smallest, Orkney Islands, with only £335m of assets and just over 3,600 members. The four options being explored along with the key considerations are shown below.

  1. Retain the existing structure

Retaining the status quo is likely to mean that inefficiencies will remain as most funds will not achieve the benefits of scale such as improved bargaining power, access to greater resources and reduced duplication of efforts in administration, governance, spending on advisers and fund management. Larger funds are also likely to be able to better access infrastructure investments. Maintain the existing approach is therefore likely to mean that costs per member are likely to be higher than necessary.

A potential negative would be the loss of local input and oversight and the regional diversification of resource such as staff as it may be difficult to access specialist staff in a single location. However the existing structure does potentially also create a key person risk as there is less available resource to cover key roles as well as budgetary and staff risk due to other competing local priorities..

Clearly any savings made or improvements achieved would need to outweigh any initial transition costs but all research to date would tend to support a move away from the status quo.

  1. Promote co-operation in investing and administration

There have already been some examples of collaboration particularly in the investment area and around procurement. This approach would allow the current governance structure to continue, allowing for continued local oversight, although requiring some sharing of control. There would also have to be some adaptation of governance.

Approaches to date seem to have been relatively informal which results in a degree of uncertainty over their future persistence so a more formal structure may be of value to assist with planning as well as the distribution of costs and returns. To date this sort of co-operation has been pretty limited despite its obvious benefits which would suggest that without strong vision and direction it will remain  something of an outlier. I can’t help feeling that greater structure and compulsion is needed to really drive change.

  1. Pool investments

This option would see all assets pooled in one or more asset pools managed centrally on behalf of a number of Funds. Schemes would retain their governance, administration and back office functions and continue to appoint and manage their advisers. This is very similar to the approach currently being adopted in England and Wales.

A single pool would double the asset size to about £42Bn over the largest Fund which has assets of just under £20Bn. At this size it would be of a similar size to 3 of the English pools and larger than the 3 others.

Fund assets and liabilities would still be allocated in the same way to ensure specific employer responsibility for liabilities.

A move of this type would be likely to result in lower cost investing though subject to some initial cost increases to manage a transition. It would also be likely to mean that the asset pool was of a significant enough size that more of the investment and administrative tasks could be undertaken in house.

From a governance perspective each Pension Committee would retain responsibility for asset allocation and managing the legislative structure however day to day investment management would be delegated to the pool. Each Fund would also maintain its Pension Board.

As has been shown in England and Wales this approach is very achievable and its hard to deny the value so would seem to be a minimum required step.

  1. Merge funds in to one or more funds

This option would see the creation of a Scottish ‘superfund’ which would manage all LGPS benefits in Scotland. Such a move would benefit from the asset pooling advantage s in 3 above but also allow for merging of the administrative and governance functions.

Such a move, whilst ultimately desirable from a cost and consistency perspective is not without its challenges. Each of the Schemes is funded at a different level and there would have to be a recognition of this and a mechanism to resolve it to ensure there was not a cross subsidy between different regions and even potentially employers. There would also have to be clarity in terms of governance, priorities and costs. There are also political drivers as well as a need to ensure that the right level of resource is available to the new consolidated scheme.

None of these challenges however are insurmountable and really just need commitment to achieve the objective and a clear plan to do so over a reasonable timescale.

The Funds all provide consistent benefits based upon a single regulatory framework. Consolidation would remove regional variations and inconsistency. Legacy arrangements would have to be clearly documented and honoured but future practice could be implemented on a wholly fair and consistent basis. Undoubtedly given the size distribution of schemes in Scotland a number of them would be likely to benefit from cost savings and improved governance very quickly. Market buying power in terms of services would be improved and greater investment possible in staff, technology and scheme communications.

Conclusion

Research carried out by Deloitte in 2011 suggested that costs per member in Scotland compared favourably with funds in England and Wales and that a single operating model and common administration system may have a greater benefit than formal administration mergers though research by APG concluded that administration costs decline with larger funds and certainly this seems to be the model being employed across UK defined contribution businesses.

It also needs to be considered that the number of employers participating in LGPS in Scotland is falling so less resources are needed and greater consistency of practice can be achieved. In addition with greater employer consolidation there will undoubtedly be increased demand for larger employers to have all benefits consolidated in a single fund rather than across multiple schemes.

In addition the benefits of having a single scheme which is not accountable to a local authority and can operate in an autonomous way based on its agreed priorities should provide greater flexibility in staff terms and conditions and therefore provide the opportunity to attract a much higher calibre of staff.

There are clear benefits which can be achieved through investment pooling and even further benefits through a consolidated single scheme for Scotland – it just needs vision and commitment to achieve them.

David Davison

In an earlier Bulletin ‘A Landmark Judgement’ I provided some information on the welcome news that the Government had thankfully lost a case in the High Court which would have forced LGPS Funds in England and Wales to invest their assets (£263Bn in 2017) in accordance with UK foreign and defence policy.

Unfortunately my relief that common sense had prevailed on this issue was misplaced as on 6 June the Court of Appeal overturned the High Court ruling forcing schemes to comply with government policy, all this despite numerous warnings from pension experts about the negative impact and increase in pension scheme costs such a decision could have.

This whole saga started back in 2016 with the Government introducing legal guidance as it was concerned pension schemes could be taking actions which might “give mixed messages abroad, undermine community cohesion in the UK, and could negatively impact on the UK defence industry.”

The policy was successfully challenged by the Palestine Solidarity Campaign and an individual scheme member in 2017 when the High Court ruled it unlawful.

The whole approach smacks of state intervention and interferes with the ability of pension schemes to take decisions wholly in the interests of the members of the scheme. The Appeal ruling also seems to contradict proposed policy to require trustees of pension funds with 100 or more members to show how they have considered environmental, social and governance factors in their investment decisions.

The Government has refuted that its objective is to make pension schemes invest in line with government policy and has commented that it is not seeking to direct schemes investment decisions but despite the assurances the legal position seems to contradict this view.

It’s hard to see how the ruling won’t lead to schemes having to review policy resulting in increased complexity and additional costs which will be wholly unwelcome and not adding any value to scheme members.

Watch this space!

David Davison

As the government announces changes to pensions regulations, David Davison explains what these mean for charities.

They say that good things come to those who wait but I suppose that depends on how long you have to wait. I’m certainly delighted after around 10 years of campaigning that it looks like finally the section 75 regulations relating to multi-employer defined benefit pension schemes (MEDBS), which have so negatively impacted on charities over many years, are to be revised.

The problem which many charities in these schemes faced was that the further build up of benefits could not be stopped without triggering an unaffordable cessation debt, therefore charities were trapped in schemes forced to continue to fund for ever rising liabilities as they couldn’t afford to exit. This was wholly inconsistent with the options available in other UK defined benefit pension schemes.

At the end of February, the Department for Work and Pensions (DWP) issued the The Occupational Pension Schemes (Employer Debt and Miscellaneous Amendments) Regulations 2018 with the expectation that these new regulations will be in place from 6 April 2018.

Key proposals

The regulations are a response to consultation carried out In April 2017 and the proposals comment on the findings of the consultation and how the government has chosen to respond.

The key proposal is the introduction of the Deferred Debt Arrangement (DDA). This will allow employers in MEDBS, whose only change is to cease to employ active members in a scheme, to retain an on-going commitment to the scheme rather than a cessation debt automatically being triggered.

It is envisaged that future contributions would be set on an on-going and not cessation basis similar to what would be the position in a standalone scheme or in the event that the scheme as a whole ceased accrual. This should offer charities really significant additional flexibility allowing them to control risk in an affordable way while focusing resource on paying down liabilities already built up rather than building further amounts.

In entering in to a DDA employers would continue to have all the same funding and administration obligations to the scheme as was the case prior to the agreement which will protect member benefits and indeed other employers.

‘The devil will be in the detail’

I don’t for a minute expect this to be the end of the story as we of course need to see how things play out in practice. As is ever the case, the devil will be in the detail, and we need to see how individual schemes react to the new flexibility and whether they seek to embrace it or look to put up barriers to implementing it.

There undoubtedly seems to be widespread consensus that change in this area is long overdue and along with these changes we’ll shortly witness similar changes to Local Government Pension Scheme (LGPS) regulation in Scotland and a review of Tier 3 employers in LGPS in England and Wales which will hopefully result in increased flexibility in these schemes as well.

Undoubtedly however this is a huge step forward and one can only hope the opportunity will be embraced by scheme trustees and employers alike.

If you want to discuss any issue raised in this article please feel free to get in touch. You can email me on david_davison@spenceandpartners.co.uk or give me a call on 0141 331 9942

This article was original publish on Civil Society website. You can read the original article here.

David Davison

The LGPS Scheme Advisory Board (SAB) is seeking the input of charities at a meeting in Birmingham on 28th February 2018. The SAB was established to encourage best practice, increase transparency and coordinate technical and standards issues.

It is currently undertaking a review of Tier 3 employers in the LGPS – details of the project can be viewed here. Tier 3 employers are all those with no tax-payer backing (i.e. colleges, universities, housing associations, charities and any admission bodies with no guarantee from a Council, academy or other tax-payer backed employer).

The aims of the exercise are to identify:

  • the duties, benefits, issues and challenges for LGPS funds, Tier 3 employers and their scheme members with regard to their participation in the LGPS.
  • options for change that would improve the funding, administration, participation and member experience with regard to Tier 3 employers.

As part of this exercise it’s vital that charities get their voices heard. A key element of this project therefore is to gather information and to facilitate this a listening meeting has been set up at 2pm on Wednesday 28th February 2018 at Colmore Gate, 2 Colmore Row, Birmingham, B3 2QD. The meeting will be an informal discussion and provide you with the opportunity to ensure your views are heard and taken into consideration as part of this review of the LGPS.

If you are interested in attending please contact Chris Darby as soon as possible at chris.darby.2@aonhewitt.com.

This is a unique opportunity to have your voice heard and facilitate the change that is needed within LGPS. Hopefully the content I have provided in previous Bulletins from ICAS will help everyone with content.

David Davison

In past bulletins I have highlighted the lunacy of organisations in LGPS Funds being forced to continue to build pension liabilities beyond the point where they are affordable. Organisations are stuck, continuing to build more and more benefits for their staff, focussing contributions on new benefits rather than looking to pay down the legacy liabilities they’ve already built up.

Organisations have the Hobson’s choice of an unaffordable exit debt or continuing accrual driven by LGPS Regulations which are patently not fit for purpose.

At last there seems to be a glimmer of hope that the problem has finally been recognised and an acceptance that these Regulations need to be changed to better protect scheme employers as a whole, and indeed the Funds themselves.

In a previous Bulletin, I highlighted the work ICAS in Scotland had undertaken to encourage Scottish Government to review the Regulations and, as a result of this the Scottish Public Pension Agency communicated a commitment to review the Regulations and issue a consultation with their proposals. True to their word a consultation was issued on 6 November 2017 with a closing date of 15 January 2018.

The consultation proposes material changes to Regulation 62 (equivalent to Regulation 64 in England & Wales) which would allow ‘exiting employers’ to cease building up future benefits but without the imposition of a gilts based cessation debt, something which is unaffordable for most. This would be via the use of a ‘suspension notice’ where Funds could agree to let employers continue to participate, effectively on an ‘on-going’ basis, with a continuing contribution commitment to the Fund. Such an approach would assist in dealing with this ‘Hobson’s choice.’

I greatly welcome the SPPA’s approach although the detail still, in my view, needs some refinement.

ICAS has provided a response to the consultation which highlights some issues and makes further practical proposals how these may be resolved.

I can only hope that the proposals are implemented (with some pragmatic amendments) and that England, Wales and Northern Ireland look to follow suit. It can only be in everyone’s interests.

David Davison

I was reading through an LGPS annual report for 2017 this week (I know, I get all the fun jobs I hear you cry!) and was struck by a comment about the scheme membership continuing to grow and linking that to the health of the scheme and it’s relative attractiveness. This ‘positive spin’ wasn’t wholly in line with my experience so I decided to do a bit of digging to see if the statements actually held water.

Trawling through some old scheme records I identified that the scheme membership had indeed grown by about 50% over the 10 years to 2017. However, when you looked a bit more closely the increases were driven more by rising numbers of deferred members, which had more than doubled. The active membership had only increased by about 29% over the period.

So this meant that the active members, i.e. those actually contributing to the scheme, had fallen as a percentage of overall membership from over 52% in 2007 to less than 46% by 2017.

Over approximately the same period the pensionable salary roll for active members had increased by about 26% with deferred pensions increasing by around 80% and pensions in payment by over 88%.

This led me to look at a few other LGPS reports and the position is broadly consistent, demonstrating something of a trend.

So what this means is that the salary increase and active membership numbers have increased by a relatively consistent amount so the future accruing liabilities are broadly consistent. However it does mean that proportionately there’s a smaller number of those funding any deficit contributions related to deferred and pensioner members and paying for the costs of running the scheme.

So the picture isn’t quite a rosy as the statement would lead you to believe. It’s also a position that’s not wholly surprising.

Given that public sector pay rises were frozen for two years from 2010 and then 1% until this year the average annual salary rise in the public sector over the last seven years has been around 1.5%.

However, CPI over the same period has been 2.3% a year. So active member benefits (linked to salary have been going up at a significantly lower rate over the period than the increases on deferred benefits and for pensioners.

However, this isn’t the whole story. In 2014 in England, Wales & Northern Ireland and 2015 in Scotland the LGPS Scheme moved from a final salary basis to a CARE basis so this means that active participants are likely to have benefitted from higher increases on their pension benefits accrued after this date than they have their salaries, and this on a higher accruing figure (i.e. 1/49th per annum vs the previous 1/60th). So while salary benefits may have been losing value in real terms that’s not wholly the position in relation to pension benefits. A ‘healthy’ position for individuals but possibly not quite so healthy for the Funds! If we are to see salaries begin to rise in the public sector over the next few years then this will be something of a ‘double whammy’ for funds.

So, the claim of materially reduced costs as a result of the 2014/15 changes has proven to be something of a con, and indeed something that many admitted bodies will have witnessed first hand.

You may therefore not want to take the healthiness of your LGPS scheme funding from Fund comments about the growth of the membership as things are far from as simple, or indeed as positive, as suggested.

David Davison

Mostly when people are told they have an inheritance it’s good news. A long lost relative or friend has bequeathed some money to you which opens up the opportunity to do all (or at least some) of those expensive items on the bucket list. Unfortunately an inheritance in an Local Government Pension Scheme (LGPS) is usually every bit as much of a surprise and shock, but far from as welcome for the recipient.

Many organisations, having become a participant in the LGPS were blindly unaware that to do so meant that they automatically inherited all the past liabilities for any staff transferring to or continuing with the organisation. Frequently this can mean that charities inherit hundreds of thousands of pounds of liabilities and in some cases many millions.

This anomaly arises because LGPS is unable to identify and allocate past service liabilities between employers, apparently only being able to allocate all of the liabilities to the latest employer. This is undoubtedly incredibly unfair as it means local authorities can deftly transfer the funding risk to an unsuspecting charity. Even where guarantees are provided tend only to protect charities on insolvency and not on voluntary exit or on increases in contributions.

The approach used by the Fund (in most but not all cases) notionally assesses the liabilities as being fully funded at outset so even if the funding level is only 90%, for example, it is assumed to be 100%. However this is far from a perfect solution for a number of reasons:-

    • The value of these liabilities will vary over time. If a further shortfall arises the funding costs for this will have to be picked up the new employer in full even though they did not employ these individuals at the time they accrued the benefits.
    • Where liabilities should have been notionally uprated frequently this has not been actually carried out or the exact terms have been lost ‘in the mists of time”.
    • Even if the benefits were fully funded this would have been on an on-going basis and not on a cessation basis. This means that on an ultimate exit the latest employer would pay a cessation debt on all these previously accrued benefits.
    • Should members benefits be subject to strain costs such as on redundancy or ill health early retirement these additional costs would have to be met in full by the latest employer.

These issues can come in to sharp focus where the latest employer has been admitted as part of an out-sourcing exercise. Procurers can inherit past service liabilities which dwarf any future service benefit which can be accrued over the term of the contract and become responsible for variations in the value of these liabilities over the contract duration and at the contract end date. Attempting to deal with these issues, usually very imperfectly, is achieved via contract negotiation and terms which again adds unnecessary complexity, inconsistency and frustration. A worked example showing the issues is available here.

Funds should really be dealing with this issue properly by segregating liabilities, as is the case in most other large multi-employer schemes. The costs related to past service liabilities would be fairly retained with the employer who accrued them with future service only being the responsibility of the new employer.

Frustratingly many Funds continue to deny the issue of inherited liabilities. It is totally inequitable to expect a small charity to pick up a cessation liability for benefits they previously inherited from a public sector body on an on-going basis, or even in many cases a funding basis well below this. I’m surprised more fuss hasn’t been made of this!!

Some Funds however have sensibly identified this and looked to deal with it fairly and I can only hope that all others will follow. Indeed these liabilities should just be re-allocated to public sector ownership, which is totally possible, and would mean that the Fund has them guaranteed with no cessation debt requiring to be paid. I can only think the reason for not doing this is the LA’s know they’ve dodged these liabilities and don’t want them back!!

The recent ICAS report made recommendations how this issue could and should be addressed. I would recommend that any charity that have witnessed significant contribution increases or have been provided with a cessation debt consider this issue and have it properly investigated as it could have a material impact and it seems an issue which when outlined would not be easy for funds to reject.

 

David Davison

The objective of bringing LGPS funds more in line with all other UK pension schemes and forcing them to invest in the best interests of members came a little closer after the government suffered a major defeat in the High Court at the end of June.

The government had issued guidance in September 2016 requiring LGPS funds to have environmental, social and governance (ESG) policies but added a requirement that funds could not “pursue policies that are contrary to UK foreign policy and UK defence policy”.

The Palestine Solidarity Campaign (PSC) launched a bid in the courts to overturn the regulations via a judicial review. It contended that the government had acted outside its powers and it was “lacking in certainty”. It also cited Article 18.4 of the EU’s directive on the Activities and Supervision of Institutions for Occupational Pension Provision (IORP) that states “member states shall not subject the investment decisions of an institution…….to any kind of prior approval or systematic notification requirements”.

Judge Sir Ross Cranston only agreed with the first argument citing that he couldn’t see “how the secretary of state had acted for a pensions’ purpose”. He therefore granted the judicial review.

A spokesman for DCLG said that the government would consider whether to appeal.

While the judgement was broadly welcomed it may not be quite the end of the issue as trade unions encourage the government to implement EU IORP directive into LGPS.

The judgement does however mean that Funds will have more freedom to take positions on ethical investment focussed wholly on the best interests of scheme members which must be a benefit.

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