Why is there no sense of crisis about the future of the LGPS?

The AMNT yesterday sent in a response (below) to the Government (DCLG) consultation on proposed new regulations on how to run the new look Local Government Pension scheme (LGPS).

The LGPS is collectively the biggest funded Pension scheme in the UK and the 5th largest in the world. There are at least 4.6 million people in the UK who are members of the £180 billion LGPS. Yet hardly anyone seems to understand that unless we are able to control costs and increase return then its entire future is in doubt.

"AMNT comments on LGPS consultation on amended Governance Regulations"

Introduction

The Association of Member Nominated Trustees is an organisation run by and for member‑nominated trustees, representatives and directors of pension schemes, both defined benefit and defined contribution, in both the public and private sector. Established in 2010, the Association now has about 350 members from occupational pension schemes with collective assets of approximately £250 billion.

These pension schemes range in size from £5 million to around £40 billion; they include defined benefit schemes that are fully open and those that are closed to further accrual or closed to new members. 

The AMNT membership includes LGPS member nominated representatives or observers. 

General Comments

Firstly, the AMNT wish to express their concern and disappointment that the government has not followed the proven private sector model of pension trusteeship with regards to the LGPS. Instead of a single partnership body made up of employer and employee representatives working in cooperation each of the 89 LGPS in England and Wales will have legally separate pension committees and pension boards.

The pension committee will continue to have no meaningful beneficiary representation in law. The only members of this committee that will be allowed to vote on decisions under local government legislation will be Councillors. It is likely that Member nominated representatives will continue to be “allowed” to participate and observe in a minority of LGPS schemes but there will be no legal right for MNTs or any beneficiaries to play a full role in the running of the scheme in the same way that their counterparts do so in the private sector.

The pension board will have some form of beneficiary representation but it is entirely unclear how these “employee” members will be selected or how its lawful role to "advise and assist" in the running of the scheme will actually happen in practice.

This appears to be confusing and unnecessary duplication. Instead of the usual co-operative approach found in the private sector trustee model, there may be conflict and disagreement between pension committee and boards. It is also unclear how such disputes and conflicts between a committee and board will be managed.

We do not understand why there is a requirement for board members to have prior experience. This is not expected of councillors on pension committees. Why is this different from the private sector where new trustees are given 6 months to gain relevant training and experience?

More detailed regulation is also needed with regard to ensuring that employee members of pension boards get sufficient time off to carry out their functions and that neither they nor their employers suffer  a financial detriment.

There is a clear democratic deficit compared to private sector pension funds. Why don't those who actual pay their own money into the pension have effective representation? Why should public pension funds be less democratic than private sector funds? The whole point of beneficiary representation is that you are more likely to get accountability and good governance since it is their money and their future pension at risk.

While in the past there was an argument that beneficiaries did not bear any direct financial risk this is now not the case. Under Treasury rules if the aggregate employer contribution for future accrual exceeds the cap of 13% then LGPS employees face benefits being reduced or contributions being raised. This could mean that more people would leave the scheme because it had become unaffordable and therefore risk the future sustainability of the entire LGPS.

It is therefore imperative that the LGPS is run as effectively and efficiently as possible. Costs must be controlled and return maximised. However, since the proposed scheme regulations are permissive, they do not comply in our view with best governance practice found in the private sector. How are funds that are being run inefficiently and poorly governed to be stopped from dragging down by poor returns the whole LGPS and breaking the employer cap?

We understand that a number of LGPS are already predicting that they will breach the 13% (19.5% with employee contributions) cost cap. When you think of the consequences if this happens then there should be a sense of crisis about the proposed arrangements and the overriding need to have accountability and good governance.

We appreciate that pension boards have to be in place by 1 April 2015 and some of the issues that we raise are the result of the Public Service Pension Act. However, there is a growing body of evidence that the proposed arrangements are contrary to European law and directives with regard to legal separation of the fund from the employer. This could mean further significant change.