Summary

The Department for Communities and Local Government (DCLG) has published draft regulations which will introduce various measures designed to improve the administration and governance of the Local Government Pension Scheme (LGPS). In particular, the draft regulations provide for:

  • Amended governance compliance statements.
  • Pension fund annual reports.
  • Pension administration strategy documents.

Consultation on the draft regulations closes on 23 March 2007. The DCLG hopes to bring the draft regulations into force on 1 May 2007.

This briefing note considers the draft regulations. Governance compliance statements:

an introduction

Since 1 April 2006, LGPS administering authorities have been required to prepare, maintain and publish (after consultation with appropriate bodies) a governance compliance statement. This statement must be revised as and when necessary following any material change in policy.

The governance compliance statement must include the following information:

  • Whether the administering authority delegates the whole or part of their function or a committee, a sub-committee or an officer of the administering authority; and
  • If they so delegate:

(a) The frequency of any committee or sub-committee meetings;

(b) The terms of reference, structure and operational procedures of the delegation; and

(c) Whether the committee or sub-committee includes representatives of employing authorities (including non- LGPS employers) or members, and if so, whether those representatives have voting rights.

Governance compliance statements: how do they differ from those already in place?

The DCLG has decided that, in addition to the above requirements, administering authorities will be required:

  • To publish details of the extent to which a delegation (or absence of delegation) complies with DCLG guidance; and
  • Where the statement does not comply with the guidance, the reasons for non-compliance.
  • To send a copy of the statement (or revised statement) to the DCLG.

Governance compliance statements: when would the first new statement have to be issued?

The first revised governance compliance statement should be published on or before 1 October 2007.

Governance compliance statements: what might the guidance contain?

There currently is no detail on the contents of the governance compliance statement. The DCLG intends to produce a set of best practice governance principles in consultation with interested parties. This guidance may include the following:

  • Aim/purpose
  • Fiduciary responsibility, general standards and conduct issues including voting
  • Role of a scheme members’ representative
  • Training
  • Governance structures
  • Meetings including minimum frequency and quorum
  • Representatives’/scheme members’ access to committee papers and information
  • Publicising representation arrangements
  • The governance compliance report

Pension fund annual report: what is it?

Each administering authority must produce a pension fund annual report which contains the following:

  • Report about the management and financial performance during the year of each of the funds maintained by the authority, including a statement of the level of funding of the fund’s assets and liabilities as at the balance sheet date.
  • Report which explains its investment policy for each of those funds and reviews the performance during the year of the investments of each fund.
  • For each fund, a statement from the actuary who did the most recent valuation of the level of funding disclosed in the valuation.
  • The current governance policy statement.
  • For each fund, the fund account and net asset statement with supporting notes and disclosures.
  • The current funding strategy statement.
  • The current statement of investment principles.
  • The current statements of policy concerning communications with members and employers.
  • Any other matters which the administering authority considers appropriate.

The draft regulations do not make it clear who is to receive the pension fund annual report. Presumably this information will be available on request.

Pension fund annual report: when would the first one have to be issued?

The administering authority will have to publish the pension fund annual report on or before 1 October in the year following the year to which it has been prepared. The first report must relate to the year beginning on 1 April 2007.

Pension fund annual report: will it add a burden on administering authorities?

No it should not. However, the requirement to produce the pension fund annual report does not absolve the administering authority of the need to produce a separate governance policy statement, funding strategy statement, statement of investment principles and communications policy statement. Administering authorities are also subject to the Freedom of Information Act requirements. For further information on this please see the February 2007 briefing notes “Freedom of information: what should authorities do?” and “Freedom of information: an opportunity for LGPS contractors?”.

Pension fund annual report: will there be guidance?

Yes. At present there is no indication of what this guidance might contain.

Pension administration strategy document: what is it?

The DCLG wants to improve the flow of data, communications and general performance of participating employers in the LGPS. As a result it proposes that administering authorities should be allowed (but not required) to prepare a pension administration strategy document setting out:

  • Procedures for liaison and communication with employing authorities in relation to which it is the administering authority.
  • The establishment of, for example, performance targets for administering authorities to achieve in carrying out their functions.
  • Procedures which aim to secure that the administering authority complies with LGPS requirements, regulations, and with any agreement about levels of performance.
  • Procedures for improving the communication by the administering authority and those authorities to each other of information relating to those functions.
  • The circumstances in which the administering authority may consider giving written notice to a relevant employing authority concerning its unsatisfactory administration performance when measured against levels of performance set out above.
  • The publication of annual reports setting out:

(a) The extent to which that authority and relevant employing authorities have achieved the performance levels; and

(b) Other matters arising from the authority’s pension administration strategy.

  • Such other matters as the authority considers appropriate, after consultation.

Pension administration strategy document: when would the first one be issued?

Where the administering authority decides to produce a pension administration strategy statement, the first one must be published on or before 31 December 2007. A copy of the final strategy must be sent to all the employers as well as the DCLG.

Poor administrative performance: would administering authorities be able to recover additional costs?

Yes. The draft regulations give administering authorities power to recover additional administration costs arising from poor administrative performance because essential data persistently is late or statutory deadlines are not met.

Where there is poor performance, the administering authority may give written notice to the employer stating:

  • The reasons for imposing the additional costs.
  • The level (and method of calculation) of additional costs attributable to the employer’s level of performance.

Where there is a dispute about the level of costs to be paid, the dispute may be referred to the DCLG to determine.

Comments

Governance has gradually been pushed up the agenda for private sector occupational pension schemes over the last couple of years or so. Similarly governance has been a hot topic for the LGPS in recent years. Given the unprecedented scrutiny the LGPS is under from the media, the private sector and council tax payers, it is imperative that existing solid governance arrangements are maintained and developed.

The draft regulations build on the governance policy statements, which were introduced in April 2006, by further formalising existing best practices. In particular, there will now have to be an expanded governance statement (to be supplemented by guidance), a fund annual report to members as well as the (optional) pension administration strategy document. As is also increasingly the case in the private sector, administering authorities must continue to monitor and challenge their schemes’ internal controls and recognise when they require professional advice to do this. Robust internal controls provide support for decision making and offer a structure for testing compliance. This can only be achieved by the development and maintenance of well-structured and well-led pension committees comprised of knowledgeable individuals empowered to make effective and timely decisions.

LGPS members need to be reassured that their scheme is being run appropriately. While it is not clear from the draft regulations who will receive the pension fund annul reports, it is to be hoped that these will be made readily available to members. A key part of governance is ensuring members are well informed. Good governance is not form filling. Good governance is a dynamic concept that administering authorities should utilise to create a stronger LGPS for members. The opportunity offered by these draft regulations to do this must be grasped.