Pensions public sector update: developments in LGPS governance

No experience necessary: DCLG responds to consultation on governance regulations

Requirements for a new governance structure in the Local Government Pension Scheme (LGPS) have been finalised and regulations published. Under the final regulations no experience is necessary for members of the new local authority pension fund boards, while local authorities will have wide discretion in setting local pension board terms of reference.

The headlines are:

• Each LGPS fund must set up a local pension board by 1 April 2015, which is to be fully operational by 1 August 2015. Board members must have sufficient capacity but the requirement for them also to have sufficient experience has been dropped following consultation.
• New regulations (the ‘Governance Regulations’) amending the Local Government Pension Scheme Regulations 2013 have been laid before Parliament. Most of the governance provisions come into force on 20 February 2015, to allow administering authorities time to establish local pension boards by 1 April 2015.
• The Shadow Schemes Advisory Board (SSAB) has also published guidance for administering authorities on the creation and operation of local pension boards, and a template terms of reference for a local pension board.
• A scheme advisory board will also be set up at national level. 

The finalised requirements

 In two consultations on the new LGPS governance requirements last year various policy and drafting issues were addressed. Significant changes have been introduced to the final regulations:

• Combined s 101 committees and local pension boards: many administering authorities already have a s 101 committee to which pension decisions are delegated. The consultation asked whether it should be possible for this to act as a combined body with a local pension board. The final regulations do make this possible, although no administering authority will be required to do this, and any that wishes to will need to have this approved by the Secretary of State.
  The guidance from the SSAB highlights the difficulties that this may raise. A s 101 committee is subject to a number of legal requirements arising from different sources, and the guidance states that in practice it may be difficult to meet all of these requirements with a combined local pension board and s 101 committee. Somewhat surprisingly, it goes onto state that it is difficult to see how a local pensions board that also operates as a s 101 committee will be able to effectively and objectively fulfil its statutory functions. Careful consideration will need to be given to the practicalities, and the legal ramifications, where an administering authority does wish to combine the s 101 committee and the local pension board.
• Capacity and experience of board members: the draft regulations required that members of local pension boards must have sufficient capacity and experience. The requirement for sufficient capacity remains in the final regulations, but the requirement for experience has been removed. A number of respondents indicated that the latter could be a significant barrier to finding enough quality board members.
• Make-up of new boards: concerns were expressed in responses to the consultations about the potential influence of board members who are not employer or member representatives. A board must have a minimum of two employer and two member representatives, and if the administering authority wishes to have more members, it may do so, but must either increase the number of employer and member representatives in equal numbers, or include other members for specific reasons. The final regulations limit voting rights to employer and member representatives (except where the board is also a s 101 committee). In addition, elected representatives of an administering authority may only sit on the board as an employer or member representative, and may not do so at all if they are involved in the discharge of the administering authority’s functions under the LGPS Regulations 2013 (again unless the board is also a s 101 committee, in which case these restrictions do not apply).
  The aim of these limits is to ensure that the main influence of the board resides with employer and member representatives but at the same time, that the board has access to the knowledge and experience of independent specialists and others. 
• Procedure to establish and operate the local pension board: the consultation asked whether the establishment and operation of local pension boards should be done as if they were committees under section 101 of the Local Government Act 1972, which had a ready-made regime which administering authorities would already be familiar with and could therefore easily follow, or alternatively whether a wide discretion should be conferred on local authorities to establish the procedures applicable to local pension boards, such as voting rights and payment of expenses. The final regulations have implemented the latter route, an arrangement favoured by nearly all of the respondents to the consultation. Administering authorities will therefore need to design the operation of local pension boards; there is a great deal of assistance on this in the guidance, and in the template terms of reference attached to the guidance.
• Joint pension boards: the overwhelming majority of respondents supported provision for joint pension boards where administration and management functions were wholly or mainly shared across a number of administering authorities, and the final regulations provide for this.

Local pension boards and the new cost cap

The new LGPS 2014 has been operating since April 2014. However the government has stated in its consultation response that no significant consequences arise out of the initial absence of the governance provisions. This, it states, is because all significant functions of the new boards, in particular in relation to cost control, will arise only after the first triennial valuation of the scheme, which is due to take place in 2016. Another aspect of the Governance Regulations is setting the employer cost cap for the LGPS 2014 at 14.6% of pensionable earnings and establishing the procedure to be followed where scheme cost exceeds the cap. Local pension boards are clearly going to be expected to play a significant role in enforcing this new cost capping regime.

Next steps

Administering authorities now need to act quickly to get local pension boards established by 1 April 2015. There is a little breathing space given that there is then a further four months in which to make them fully operational, but nevertheless, action to create the board is needed now.