Meeting: Pension Fund Committee (County Hall, Durham - Committee Room 2 - 28/01/2008 10:00:00 AM)
Item: A6 Governance Compliance Statement
| Report of Stuart Crowe, County Treasurer |
Purpose of the Report 1 The purpose of the report is to ask Members to approve the Governance Compliance Statement the Council has to submit to Communities and Local Government (CLG).
Background 2 All Local Government Pension Scheme (LGPS) administering authorities are required to publish a Governance Compliance Statement by 1 March 2008. CLG has consulted on draft guidance and asked authorities to prepare statements on the basis of this draft guidance.
3 The Council responded to the consultation exercise and a copy of the response is included at Appendix A.
Governance Compliance Statement 4 The Council’s Governance Compliance Statement is included at Appendix B.
5 CLG has not produced the final guidance for preparation of Governance Compliance Statements. Any changes made before 1 March 2008 between the draft and final guidance will need to be included in the final published version of the statement.
6 If approved, the statement will be distributed to Scheme Employers and placed on the Council’s website by 1 March 2008.
Recommendation 7 Members are asked to agree the Governance Compliance Statement for the Fund set out in Appendix B and approve its publication by 1 March 2008.
8 Members are asked to authorise me to make any changes necessary to the statement including any changes needed should the final guidance differ materially from the draft guidance.
| Contact: Nick Orton Tel: 0191 383 4429 |
pen/rep/kno10
Appendix A (0191) 383 4429
nick.orton@durham.gov.uk
Nick Orton
9 November 2007
Mr R Holloway
CLG
By email
Dear Mr Holloway
Local Government Pension Scheme Regulations 1997 Governance Compliance Statement: Draft Statutory Guidance Consultation response on behalf of Durham County Council I am writing in response to your letter dated 8 October 2007, which asked for comments on a draft of the statutory guidance about completing a Governance Compliance Statement issued under Regulation 73A(1)(c) of the 1997 regulations. We welcome the opportunity to comment on this guidance.
Durham County Council is the largest local authority in the North East of England with a population of 499,800. It is also a major employer within the Local Government Pension Scheme with over 10,000 current employees contributing to the Scheme. The Council also has a key role to play as an administering authority within the Local Government Pension Scheme and is responsible for the administration (including investments) of the Durham County Council Pension Fund.
Please find enclosed a response sent on behalf of Durham County Council as an administering authority within the Scheme.
I hope this is useful, please contact me if you need to discuss any of the issues raised in this response.
Yours sincerely
Nick Orton
Head of Pensions
Local Government Pension Scheme Regulations 1997 Governance Compliance Statement: Draft Statutory Guidance. Consultation response on behalf of Durham County Council as an Administering Authority. General comments Paragraph 5 states that it is the local authorities and local council tax payers who are the ultimate guarantors of the scheme. In practice, most local authority income (up to two thirds in come cases) comes from central government. This means the cost of the local government pension scheme is mainly being met by tax payers across the country, not just “local council tax payers”.
Administering authorities will be required to measure their governance standards against the standards set out in the statutory guidance and give reasons for not complying. In practice, any deviation from the central guidance will be scrutinised by internal and external auditors and there is a danger that this approach will lead to a central governance methodology being imposed upon the 89 LGPS pension funds in England and Wales. This imposition of a central government agenda on local government through the imposition of firm statutory guidance is at odds with the Government’s recent dramatic reduction in the number of key performance indicators it will measure in local government.
Comments on the text of the draft guidance Structure Paragraph 18 lists four best practice principles. Principles a), c) and d) deal solely with the relationship between a secondary committee or panel and the main committee. Principle b) also makes reference to the existence of a secondary committee. This emphasis on secondary committees suggests that best practice is to have such a secondary committee. However, given that principle a) states that decisions on investment management and the administration of benefits remain the responsibility of the main committee, it is not clear what the expected role of the secondary committee would be or why there should be such a focus on a secondary committee (for information, here in Durham there is only one committee which deals with all business and this works well and is liked by Members as they see it as “inclusive”).
Representation Paragraph 20 states that deferred and pensioner scheme members “clearly have an interest in the performance of pension committees”. This seems to contradict statements made in background section, such as paragraph 7 which states that “benefits are guaranteed by statute” and “scheme members in the LGPS bear none of the investment risk”. It is difficult to envisage a decision made by a pension fund committee that would have a direct impact on the current or future pension benefits of a scheme member. Scheme members could be affected by decisions made on communications and administration however committees rarely directly make decisions on these issues. Scheme members including deferred and pensioner members have an interest in the efficient day to day administration by officers delivering these services rather than the committee.
Paragraph 21 lists the advantages of inviting an independent professional observer to join the committee, these include:
· To enhance the experience, impartiality and performance of committees
· To improve the public perception of good governance
· To carry out independent assessments of compliance against the Myners’ principles
· To carry out risk assessments
There is no explanation of the type of professional observer referred to here. Would they be a professional simply by virtue of the fact they were being paid to attend the meeting or is there some professional qualification required to meet the criteria?
Also, most committees and authorities already undertake risk management and have a duty to report on their compliance to Myners’ principles and often are advised by investment advisers or qualified Treasurers. It is unlikely that the general public are aware of the operation of local government pension committees so it is difficult to see how public perception of their good governance could be improved. It is also unclear how the presence of an independent professional observer would necessarily enhance the experience, impartiality and performance of committees.
Best practice guideline a) states that all “key stakeholders are afforded the opportunity to be represented within the main or secondary committee structure.” The guideline goes on to list the key stakeholders as including employing authorities, scheme members, independent professional observers and expert advisors. It is difficult to see how independent professional observers and expert advisors can be classed as key stakeholders in the LGPS. Also, whilst scheme members are the beneficiaries of the LGPS their benefits are not affected by the activities of pension committees so they are not “key stakeholders” in the decision making process in the same way that employing authorities are.
Voting The best practice guideline on this subject states that an administering authority’s policy on voting rights should be clear and transparent and should include “the justification for not extending voting rights to each body or group represented on main LGPS committees”. This suggests CLG expect some of the groups represented on committees not to have voting rights. It would be useful to have guidance on what CLG considers are acceptable reasons for not extending voting rights. But fundamentally, if professional observers / advisers are deemed necessary they should not be given voting rights.
Meetings Paragraph 30 refers to the Government’s aim of “improving the democratisation of LGPS committees” - this is an unusual description for wanting to move away from the current position where an LGPS committee can be entirely comprised of democratically accountable elected councillors.
CLG suggests that employer road-shows or AGMs could be set up where questions could be addressed to members of the committee. Is there any evidence of an appetite for such road-shows or presentations? Some authorities do attempt to engage their wider membership in this way but find it an expensive way of communicating with pensioner members and not viable at all with active members (owing to poor turn-out).
Scope Paragraph 34 states that where “decisions are to be taken by LGPS committees that could impact on the cost-sharing mechanism, it is reasonable to expect scheme member representatives to be present on those decision making committees”.
The Government Actuary’s Department (GAD) produced an initial paper on cost-sharing which included a list of those elements that should be included in assessing changes to future pension costs that could be shared with the scheme membership. The elements GAD listed were - longevity improvements, other demographics, pay increases, benefit options and changes to benefit structure. None of these elements are likely to be affected by decisions made by LGPS committees, so it is difficult to see how future cost-sharing can be used as an argument for scheme member representation on LGPS committees.
Correlation between Governance and Funding levels Section 6 of Annexe B includes some information under the heading “Correlation between Governance and Funding levels”. This seems to be an attempt to produce evidence that increasing the items of member representation on a pension fund committee will have a positive impact on the funding level of a Fund. There are a number of problems with this, for example:
· The figures provided suggest it is better to have no representation than one item of representation. Similarly it seems to be better to have 3 items of representation rather than 4.
· Taken in isolation, a Funds funding level can be fairly meaningless as there is no indication of the actuary’s assumptions used in determining this funding level or the employer contribution rate resulting from it.
· Even if we accept that evidence of correlation exists, this is not evidence of cause and effect. It is quite possible for example that Funds with a higher funding level feel more able to concern themselves with extending member representation as they have less concerns on the investment return front. It is also quite possible that a third unidentified factor makes it more likely that funding levels will be higher and that a larger number of items of member representation will be present.
· Are the differences revealed statistically significant given the small sample size?
Summary Whilst appreciating the regulatory requirement for CLG to issue statutory guidance on the governance compliance statement, we have a number of concerns with the draft guidance.
The general approach adopted appears to be to mirror the developments in private sector pension schemes and in particular the requirement for trustee boards to have member-nominated trustees. However, the position for LGPS funds is radically different with benefits protected by statute and decisions on regulations being made by central government not by the local funds. The key stakeholders in the LGPS are the employing authorities and the taxpayers (as they ultimately fund most of the employing authorities). These key stakeholders are already represented on most LGPS committees through the elected members.
There is an argument that scheme members should be represented on committees to encourage a sense of ownership of the Fund and to help publicise the investment issues under debate. However, our concern is that the way the guidance is currently drafted means the default position will be for Funds to include member representatives with voting rights on their committees when there is no evidence this will improve investment decision making
The guidance also supports the inclusion of “independent professional observers” on pension committees. Again, this is an attempt to mirror the position in the private sector where some trustee boards have professional independent trustees as members. It is not clear how their independence or professionalism will be assessed and it is also not clear how the benefit of having an “independent professional observer” will outweigh the cost. By including these individuals in the statutory guidance there is a danger the default position for authorities will be to include them on their committees without first assessing their potential value.
TO VIEW APPENDIX B PLEASE LAUNCH THE ADOBE ICON BELOW OR ALTERNATIVELY PLEASE REFER TO HARD COPIES LOCATED IN CORPORATE SERVICES OR THE COUNTY RECORDS OFFICE Attachments
Item 6.pdf