By Neil Sellstrom, Pensions and Treasury Advisor, CIPFA
Good governance is an essential ingredient for any successful organisation. Once that’s in place, the organisation can concentrate on those things that add value.
For the Local Government Pensions Scheme (LGPS), focus must be on protecting member benefits while keeping taxpayer and employers' costs low. And at a time of heightened scrutiny on the costs of fund managers, it is crucial that strong governance structures are in place to ensure asset allocation decisions are made effectively and that the best fund managers are selected.
With 5.2 million users, 7,000 employees, and the control of assets exceeding £200bn, the LGPS is the largest funded (contributions are paid into an investment fund and pensions are paid out of this pot) pension scheme in the country.
Over the long term, the scheme has delivered results that compare well with the corporate sector, however, a number of challenges in recent years, such as budget cuts and a drop in interest rates, have resulted in an increase in the present value of liabilities.
During his speech at the 2015 Conservative Party Conference, the then Chancellor, George Osborne, announced his intention to bring together the assets of the 90 LGPS funds across England and Wales and merge them into six ‘British Wealth Funds’.
The rationale behind the move is that by pooling investment, costs can be reduced through economies of scale and the sharing of expertise, while the schemes can maintain overall investment performance.
The move will mean that the selection of fund managers will be made by the investment pool operator on behalf of a pool of co-operating administrative authorities, while individual investment strategies, including asset allocation, will remain the responsibility of the individual administrative authority.
The process is scheduled to start in early 2018 and good governance will help ensure clarity of objectives, independence of action and transparency of operations.
The basic principle of local government governance should form the foundation for the asset pools. CIPFA’s Delivering Good Governance in Local Government: Framework
sets out the need for strong ethical values, integrity, openness and comprehensive stakeholder engagement, which can be demonstrated by:
- defining outcomes (economic, social and environmental benefits)
- recognising required interventions needed to optimise outcomes
- building capacity, including an organisation’s leadership
- performance and risk management
- setting out accountability, specifically through reporting and auditing.
However, while the pension funds will continue to be managed and maintained by the separate administering authorities, the pooling of £200bn worth of assets involves a huge number of stakeholders, all of whose interests will need to be balanced.
Each pool will require a fund manager and will need to establish or hire a Financial Conduct Authority (FCA) regulated operator. The FCA regulated operator will then be overseen by a board or committee that represents all those local authorities participating in the investment fund. In addition there might also be co-opted members, independent observers, scheme member representatives, employee representatives, investment consultants etc.
Given this complex web of stakeholders involved in the investment pooling, robust governance will be vital to ensuring a smooth transition and continuing operation of the funds. Each local authority that is brought together through this process will need to establish an appropriate mechanism for managing its relationships with others through mutual interests that are dependent on the alignment of each local authority’s strategies and objectives within the investment pooling.
Establishing this governance should cover all duties and responsibilities and there must be agreement over what each asset pool aims to achieve. For the LGPS, protecting members’ benefits and keeping the cost to taxpayers and employers to a minimum are the key objectives. A strong governance structure will ensure that asset allocation decisions are made effectively and the best fund managers are selected.
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