Public sector pensions update: better governance and improved accountability in the LGPS

Developments in LGPS governance and cost control

In this publication we bring you up to date with the latest developments on governance and cost control in the LGPS, including highlights from a further consultation from DCLG on new governance and cost control requirements in the LGPS, publication of draft guidance on the creation and operation of local pension boards, and publications by the Pensions Regulator in this area.

The latest LGPS consultation

The Department for Communities and Local Government (DCLG) has published a further consultation on regulations that will bring into force new governance and cost control requirements in the Local Government Pension Scheme (the LGPS). DCLG first consulted on these regulations in June 2014. This latest consultation makes some changes to the original proposals on governance, includes new provisions on cost control, and gives a further opportunity to make responses on the regulations to DCLG.

The consultation ran until 21 November 2014. It is still planned that the new governance and cost control requirements will come into force from April 2015.

Background

One of the key aims of the public service pensions reform process has been to raise the standard of management and administration of public service pension schemes and to achieve more effective representation of employer and employee interests in that process. The Public Service Pensions Act 2013 (“the Act”) includes a requirement designed to achieve this objective so that public service pension schemes must each establish scheme advisory boards at a national level, and local pensions boards where the structure of the scheme warrants that. These regulations set out the details of this for the LGPS.

Another key aim of the reforms was to ensure a fair balance of risks between scheme members and the taxpayer. An employer cost cap mechanism is being established, as well as an internal cost management process designed to stabilise employer and member contribution rates. The regulations in this latest consultation contain new provisions on these cost control measures.

The new governance structure

The diagram below shows an overview of how the new structures will fit into the LGPS – although until we have the final legislation this is still subject to change. The revised regulations in the latest consultation contain new provisions ensuring that both local pension boards and the national scheme advisory board have wide powers to take any actions necessary to fulfil their functions. Elected members will be allowed to be members of local pension boards, provided they are not directly involved in pensions matters in their elected capacity. The Secretary of State will be responsible for appointing the Chair and all other members of the national scheme advisory board.

Statutory guidance on pension boards

The much anticipated draft guidance on the creation and operation of local pension boards was issued for consultation in late October by the Shadow Scheme Advisory Board. Given the lack of detail in the legislation (both the Act and the regulations) the guidance is going to be particularly important to administering authorities as they grapple with what is required.

At one level, the 66 pages in the draft guidance is comprehensive. It includes significant material on the legislative background and how pension boards should be established and resourced. There are many pages on such key governance matters as knowledge and understanding, conflicts of interest and reporting. However, big questions remain as to how pension boards must actually go about fulfilling their very onerous governance objectives. How in practice are members of pension boards going to engage with, and if necessary challenge, administering authorities to help them deliver “effective and efficient governance and administration”? Instead of addressing that question, the guidance focuses heavily on ensuring that the boards themselves are compliant with a raft of good-governance requirements. That is understandable, but the result is an inward-looking emphasis and the risk is that pension boards will focus too much time worrying about their own internal governance performance rather than that of administering authorities.

Overall, the guidance leaves much of the detailed implementation to local decision-makers. That again is understandable, but for those tasked with implementing the legislation it might have been more useful if it had offered more by way of practical assistance as to how pension boards are to undertake the vital task of assisting the LGPS to reach better levels of governance.

Cost control mechanisms

New provisions in the latest draft of the regulations just consulted on set out the process to be followed if a valuation of the LGPS shows the cost of the scheme is outside prescribed margins. DCLG would need to ensure that any increases or decreases in the cost of the scheme of two percentage points or more would be offset, for example, by varying the rate at which scheme members’ benefits build up.

In addition, the proposed national scheme advisory board would aim to ensure that the total pension contributions paid by employers and employees were within one percentage point of 19.5% of pensionable pay and that employee contributions were one third of the overall costs. The national board could make recommendations to DCLG on changes to the scheme to achieve these targets. The employer cost cap will take precedence over this secondary mechanism.

Pensions Regulator ‘Quick guides’ to pension boards

To help schemes prepare for the implementation of pension boards, the Pensions Regulator (TPR) has published two ‘quick guides’ to pension boards, one being a guide to pension boards, and one being a guide for pension board members. The guides are not specific to the LGPS, but are applicable to all affected public service pension schemes.

The guide to pension boards highlights the key areas of governance and administration they will be responsible for, provides information on board constitution and meetings, who the boards will work with, and sets out what information needs to be published about the board.

The guide for pension board members covers their roles and responsibilities, provides information on knowledge and understanding requirements, reporting breaches and conflicts of interest as well as an outline of the role of the scheme manager.

In relation to the knowledge and understanding requirements for pension board members, TPR states that it will provide a free online learning programme on public service pensions, which will presumably be similar in format to the current trustee toolkit that helps private sector occupational pension scheme trustees with their knowledge and understanding requirements.

TPR now has an area of its website dedicated to public service schemes (click here) with a variety of resources to aid those involved in these schemes. This highlights the growing influence of TPR in public service pensions. TPRs draft Code of Practice on the governance and administration of public service pension schemes was issued for consultation in December 2013, and the government stated in an interim response that its aim was to lay the final Code before Parliament this autumn. We therefore anticipate this being issued shortly, and going forward we can expect further publications from, and involvement of TPR in this area.