Summary

On or before 1 March 2008, Local Government Pension Scheme (LGPS) administering authorities will have to publish their first revised governance compliance statement. The Department for Communities and Local Government (DCLG) has published for consultation draft guidance setting out best practice governance principles.

This briefing note considers the draft guidance. For further details on the new wider LGPS governance requirements see the June 2007 briefing note, “LGPS governance: finalised regulations”.

Governance compliance statements: a reminder

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 changes in policy.

The governance compliance statement must include the following information:

  • Whether the administering authority delegates the whole or part of its function to a committee, a sub-committee or an officer of the administering authority. If it so delegates:
    • The frequency of any meetings, the terms of reference, structure and operational procedures of the delegation, and
    • 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.
  • Publish details of the extent to which a delegation (or absence of delegation) complies with DCLG guidance.
  • 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.

What is the purpose of the guidance?

The purpose of the guidance is:

  • To provide best practice principles against which compliance can be measured.
  • To provide guidance on how the compliance statement should be completed.

When does consultation close?

The consultation closes on 9 November 2007. However, the DCLG suggests that administering authorities and other interested parties should start preparing their governance compliance statement on the basis of the draft guidance.

What do the best practice principles cover?

The guidance sets out the best practice principles in relation to the following governance areas:

  • Structure
  • Representation
  • Selection and role of lay members
  • Voting
  • Training, facilities and expenses
  • Meetings (frequency/quorum)
  • Access
  • Scope
  • Publicity

Best practice principles: structure

The guidance acknowledges that not all administering authorities are structured in the same way. The intention is not to level out these differences but instead to ensure that the structures reflect the following principles:

  • The management of the administration of benefits and strategic management of fund assets clearly rests with the main committee established by the appointing council.
  • Representatives of participating LGPS employers, admitted bodies and scheme members (including pensioners and deferreds) are members of either the main or secondary committee established to underpin the work of the main committee.
  • Where a secondary committee or panel has been established:
    • The structure ensures effective communication across both levels.
    • At least one seat on the main committee is allocated for a member from the secondary committee or panel.

Best practice principles: representation

In relation to representation the guidance seeks to ensure that the composition of committees, both formal and secondary, offers all key stakeholders the opportunity to be represented. At the same time the guidance acknowledges that it is impractical to expect every group with an interest in a decision to be represented on relevant bodies.

The guidance comments that an independent professional observer could also be invited to participate in the governance arrangement to enhance the experience, continuity, knowledge, impartiality and performance of committees or panels.

The best practice representation principles are that:

  • All key stakeholders are afforded the opportunity to be represented within the main or secondary committee structure. These include
    • Employing authorities (including, for example, admitted bodies)
    • Scheme members (including deferreds and pensioners)
    • Independent professional observers
    • Expert advisers (on an ad hoc basis)
  • Where lay members sit on a main or secondary committee, they are treated equally in terms of access to papers and meetings, training and are given full opportunity to contribute to the decision-making process, with or without voting rights.

Best practice principles: selection and role of lay members

The guidance makes it clear that the administering authority’s role is to determine what sectors or groups are to be invited to sit on LGPS committees or panels and to make places available. At the same time it is key that committee or panel members act in the best interests of LGPS members: they are not there to represent their own local, political or private interests.

The best practice selection principle is that committee or panel members are made fully aware of the status, role and function they are required to perform on either a main or secondary committee.

Best practice principles: voting

The best practice principle on voting is that the policy of individual administering authorities, including the justification for not extending voting rights to each body or group represented on main LGPS committees.

Best practice principle: training, facility, time and expenses

Administering authorities are required to report compliance with the Myners investment principles. However, the guidance comments that on the wider issue of governance, administering authorities should comply with the following principles:

  • In relation to the way in which statutory and related decisions are taken by the administering authority, there is a clear policy on training, facility time and reimbursement of expenses in respect of members involved in the decision-making process.
  • Where such a policy exists, it applies equally to all members of committees, sub-committees, advisory panels or any other form of secondary forum.

Best practice principles: meetings (frequency/quorum)

The guidance notes that some administering authorities have introduced a multi-level committee structure with different reporting or meeting cycles. The guidance provides that these committees should comply with the following principles:

  • An administering authority’s main committee or committees should meet at least quarterly.
  • An administering authority’s secondary committee or panel meet at least twice a year and is synchronised with the dates when the main committee sits.
  • Administering authorities who do not include lay members in their formal governance arrangements, provide a forum outside of those arrangements by which the interests of key stakeholders can be represented.

Best practice principles: access

The guidance and the best practice principles make it clear that, subject to any rules in the council’s constitution, all members of main and secondary committees or panels have equal access to committee papers, documents and advice that falls to be considered at meetings of the main committee.

Best practice principles: scope

Committees of administering authorities have become responsible for more than just the management and investment of funds. They have become responsible for formulating policy on issues like abatement, compensation and the exercise of discretions under the LGPS regulations. The guidance notes that this change means administering authorities need to be flexible and to ensure that their committees are flexible and willing to change to reflect scheme changes and wider pension issues. The result of this is the best practice principle that administering authorities take steps to bring wider scheme issues within the scope of their governance arrangements.

Best practice principles: publicity

The guidance notes that one of the best practice principles is that administering authorities have published details of their governance arrangements in such a way that stakeholders with an interest in the way in which the scheme is governed can express an interest in wanting to be part of those arrangements.

The compliance statement

The DCLG envisages that compliance with the principles will be demonstrated by completion of the table set out at annex A of the draft guidance. This table will require the administering authority to set out whether it is compliant with the principles. Where there is non-compliance this should be explained.

Comments

As we have commented before, the LGPS is under unprecedented scrutiny from the media, the private sector and council tax payers. It is imperative that existing solid governance arrangements are not only maintained and developed but that the existence of such arrangements is clearly demonstrated.

The revised governance compliance statement, together with the pension fund annual report and the pension administration strategy, provide the building blocks to assist the LGPS funds to both put in place strong governance procedures and to evidence that such procedures are in place.

Since April 2006 administering authorities have had to produce governance policy statements. The draft guidance (which supplements regulatory requirements) and the need for administering authorities to confirm the degree of compliance with the draft guidance seeks to further formalise existing best practices.

The key to pension governance arrangements in both the public and private sectors is the development and maintenance of wellstructured and well-led pension committees which are comprised of knowledgeable individuals empowered to make decisions. The draft guidance sets out the best practice principles to enable administering authorities to achieve this.

However, the draft guidance is just that; it is guidance. It is structured in such a way to give flexibility to administering authorities and their committees. One size does not fit all the individual funds within the LGPS. Well governed funds should need to make only minimum changes in order to demonstrate that they already have robust internal controls in place and are complying with the key principles of the draft guidance.

It is important to note that while consultation on the guidance does not close until 9 November 2007, the DCLG is keen for schemes to begin to follow the principles before the guidance has been finalised.

This briefing note is based on the Draft Governance Compliance Statutory Guidance published by the Department for Communities and Local Government on 8 October 2007. Consultation closes on 9 November 2007