Good governance is an essential ingredient for any successful organisation. Once that is in place, the organisation can concentrate on those things that add value.
For the Local Government Pension Scheme, focus must be on protecting member benefits while keeping taxpayer and employers' costs low. 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 pension scheme in the country.
Over the long term, the scheme has delivered results that compare well with the corporate sector, but 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, then-chancellor George Osborne announced his intention to bring together the assets of the LGPS funds across England and Wales and merge them into six ‘British wealth funds’.
As many officers know, 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 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 early next year 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 document, 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:
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 to establish or hire a Financial Conduct Authority-regulated operator. The FCA 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 representative, 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 their relationships with each other through mutual interests, which will depend on the alignment of each local authorities’ strategies and objectives within the investment pool.
Establishing this governance should cover all duties and responsibilities and there must be agreement over what each asset pool aims to achieve. For LGPS funds, 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.