UK: LGPS Governance - A Step Closer To The Private Sector?

Originally published in Insight - Human Capital (Pensions), Spring 2008

The implementation of the new look Local Government Pension Scheme ("LGPS") in England and Wales took another step towards becoming a reality via the LGPS (Amendment) (No 3) Regulations 2007 ("Regulations"). These came into force on 30 June 2007 and amend the LGPS Regulations 1997 (the "1997 Regulations"). The introduction of new governance measures, pension fund annual reports and local administration strategies are designed to bring LGPS governance requirements closer to those in the private sector, with a view to improving administration and the auditing of the LGPS' funds. The Regulations place certain obligations on administering authorities to take actions over the period to December 2008.

Governance compliance statements

Regulation 73A of the 1997 Regulations (governance policy statements) has been replaced with a new section on 'Governance compliance statements'. The requirements under section 73A largely remain unaltered but the Regulations do introduce a new requirement, namely that an administering authority will be required to measure its governance arrangements against a set of best practice principles published by the Government. If its governance arrangements do not comply with all of the principles, then the administering authority will have to state the reasons for any such non-compliance.

The first of such statements must be published by the administering authority no later than 1 March 2008. Copies of the statement must now be sent to the Secretary of State as soon as possible after it has been published. (This will enable the responses to be collated and the findings on the governance arrangements to be published in due course.)

However, although the Government expected to publish its best practice guidance in August 2007, the Government only issued guidance in draft form in mid- October 2007. Authorities were invited to submit their comments on such draft guidance by 9 November 2007. Given the deadline of 1 March 2008 for administering authorities to publish their compliance statements, this does not give them very long to consider compliance. However, the Government has stated that administering authorities should prepare their statements on the basis of the draft guidance rather than waiting for amendments that might be submitted following the comments made during the consultation period.

Pension fund annual report

Although administering authorities already prepare and publish fund annual reports, the Government has decided to be more prescriptive about the contents of such reports. The purpose of new Regulation 76B in the 1997 Regulations is to provide external auditors with the means to undertake separate audits of LGPS pension funds as opposed to current practice whereby funds are audited as part of the main council audit.

Administering authorities will be required to include various specific items in their annual report, including details of the management and financial performance of the fund, details of the administration arrangements for the fund, details of the authority's investment policies, a funding strategy statement and a statement of the authority's investment principles. Administering authorities are advised to view the list of specific items as a minimum requirement and are encouraged to add any other material that may accord with the circumstances in their locality.

Regulation 76B requires administering authorities to publish their pension fund annual report by 1 December following the year end (in respect of which the report relates). The first report will therefore be due by 1 December 2008 in relation to the 2007/2008 reporting period. Although the final version of the Regulations no longer includes the draft provision that would have required administering authorities to submit copies of their annual reports to the Secretary of State, authorities are encouraged to submit copies to the Department.

Pension administration strategy

A new Regulation 76C is incorporated into the 1997 Regulations relating to the preparation and publication of local administration strategies. The new provision gives administering authorities the discretion to prepare and publish a pension administration strategy that will formalise the administrative arrangements between itself and the participating employing authorities.

Regulation 76C sets out a list of matters that the administering authority may consider to be appropriate for inclusion in the strategy. These matters relate to the performance of the administering authority and employing authorities in relation to their functions under the 1997 Regulations and include communication policies between the authorities and procedures for improving such policies, establishment of performance targets and performance level agreements in relation to their functions under the 1997 Regulations, procedures that aim to secure statutory compliance in respect of these functions and circumstances in which the administering authority can put the relevant employing authority on notice (see heading below) that their performance is unsatisfactory in relation to any targets or agreed performance levels that have been established within the strategy.

When an administering authority first publishes a strategy, it must send a copy to the relevant employing authorities and the Secretary of State. The administering authority must also revise the strategy following any material change to any of the matters contained within it and notify the employing authorities and the Secretary of State of any such revisions and where a copy of the revised strategy can be obtained. During the preparation and revision process, the administering authority must consult with the relevant employing authorities (and any other interested parties).

Poor administration and the recovery of additional costs

Regulation 6 inserts Regulations 81A and 81B into the 1997 Regulations to supplement the existing Regulation 81 that enables the administrative authority to recover administration costs from the employing authorities. Regulation 81A enables the administrating authority to recover additional costs they have incurred, as a result of an employing authority's (including admitted bodies) poor performance in carrying out their functions under the 1997 Regulations, by following the procedure for giving notice set out in Regulation 81A(2).

Regulation 81B provides that an administering authority may also have to pay similar additional costs if such have been incurred by their poor performance in carrying out their functions under the 1997 Regulations. The new power to enable an authority to recover costs incurred in respect of administrative functions is welcome as it will act as an incentive to ensure that there is a proper flow of information.

So...a Step Closer to the Private Sector?

The changes do bring LGPS governance closer to the requirements in the private sector, but for many, the new obligations will represent what they already considered to be good practice. However, administering authorities will need to be aware of the new documents, requirements and deadlines, and go through due process in preparing them.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.