For nearly a year the majority of news about the Local Government Pension Scheme (LGPS) has been focused on the Department for Communities and Local Government (DCLG) Consultation: ‘opportunities for collaboration, costs savings and efficiencies’.
My colleagues, our peers across the LGPS and I have all written many column inches – much like this – discussing which models we see as best, putting the case forward for the right investment strategy, or highlighting the benefits of Funds joining forces.
While this has been taking place, there has been another major piece of reform, which is of equal importance: the consultation on LGPS governance. One of the primary reasons this has not received equal airtime is that there have been no significant variations in opinion: the majority of LGPS funds believe that effective governance is an essential tool in tackling the deficit and building growth.
One of the most important actions that the LGPS has put in place is the formation of Local Pensions Boards (LPB). The LPBs differ from a fund’s main board in that they will be responsible for securing compliance with LGPS regulations, other legislation relating to governance of the scheme, any requirements of The Pensions Regulator, and in ensuring effective governance and scheme administration.
In a recent Grant Thornton survey, 70% of respondents said that LPBs could benefit the management of their fund. A number of them went further and emphasised the importance of the experience and skills the LPB members needed to bring.
We agree with this sentiment. When the reform was announced we were pleased that the consultation included a request for views on whether there should be regulatory requirements on LPB members and administering authorities’ pension committees to have the training, knowledge and capacity to effectively undertake their roles. We strongly supported it.
That is why we recently following our advertisements in the local government and financial press and a joint appointments process we appointed William Bourne as the joint chair of both Lancashire County Pension Fund’s (LCPF) and LPFA’s separate Local Pension Boards) With LCPF and the LPFA at the early stages of developing a £10bn ALM partnership arrangement, the recruitment of an independent chair to oversee both Local Pension Boards was seen as the right route forward.
William has more than 30 years’ experience across pensions and finance and has advised pension funds in the UK and Europe, including a major Scandinavian local government pension scheme.
There is great merit in professional specialists directing scheme governance, and the knowledge and skills of the board and committee members is an important aspect of this. At LPFA our board members are appointed for their expertise in pension fund management, public service and corporate governance. We already operate in line with the CIPFA Knowledge and Skills Framework, use the Trustee Toolkit and have structured training and appraisals for our members as well as regular reviews of our governance processes.
Our board has also helped to create our investment strategy. A liability-driven approach that has already been the catalyst for change within our portfolio, prompting a move to invest more of our fund in illiquids, such as housing, private equity and infrastructure, whose returns profiles better match our liabilities. A further element introduced to our investment strategy is a concentrated ‘buy and hold’ approach to equities, which delivers savings through reduced transaction fees and in-house management.
Skilled and trained governance has been shown to have a positive impact on fund performance. Without the benefit of our board, many of whom are experts in illiquids, we would not have been able to make these changes to our strategy, which are helping to manage our deficit down.
However, this level of governance is not the same across the LGPS.
A recent BBC Four report in to the LGPS raised a serious point that we cannot dispute: that some funds operate and make decisions without the right level of expertise.
Under the current LGPS structure it is inevitable that decisions are made by local councillors. While many funds have councillors with a financial background overseeing them, others may not. We should not seek to point fingers. What we should do is to provide support and effective governance, where appropriate, to all our fellow LGPS fund, and to encourage the notion of collaboration so that all funds are able to take advantage of best in class governance in the future.
It is worth remembering that there are a wide variety of employers involved with LGPS funds – smaller employers such as charities and those who are members of the scheme for historic reasons – who would benefit from improved governance and expertise in all aspects administering the scheme.
While governance obviously brings extra cost, we believe it can create a dividend in fund performance, assist those that manage our public sector pension schemes and is an essential tool in tackling the LGPS deficit.
Susan Martin is chief executive of the London Pensions Fund Authority
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