The Root of all Evil in the Local Government Pension Scheme

The Pensions Institute last week issued a very provocative report which does raise some important points about process and scale but misunderstands the real nature of the governance deficit in the LGPS (in London and elsewhere).

Which is Councillors have a clear fiduciary duty to Council tax payers, but pension funds should (must by European law) be run in the interests of beneficiaries not employers. This dichotomy does mean that some LGPS schemes have indeed made poor decisions based on Council tax considerations. However, this is not just a “London thing” and some of the larger schemes have faced similar accusations.

Unlike the private sector Defined Benefit schemes where you have at least 1/3 beneficiary representation there is no similar legal right in the LGPS. Some schemes have consistently refused to have any beneficiary representation not even as observers.

Member nominated trustees and representatives (MNR) have a real interest and “ownership” of their schemes. The trustee model has its faults but on the whole has worked well over the years in trying make sure that pensions schemes are well governed and principles are not ripped off by agents. We need to do much, much better, but if you have no effective beneficiary representation on schemes and also a fundamental conflict in fiduciary duty then no wonder some of them go astray.

The answer is to mirror the best practise in private sector DB schemes and have statutory beneficiary representation in the LGPS as well as employers. The fiduciary duty of all representatives must be to the beneficiaries.

It is disappointing that this Pension Institute report has not had any input at all from existing LGPS beneficiary representatives nor does it make any reference to the changes already agreed to the scheme such as theire will be an employer contribution “cap and collar”. This is probably the most significant development in LGPS governance in decades.

I must admit that the “evidence” in the report for the serious “wrong doing” suggested is pretty weak and antidotel. It may or may not be true (and I strongly suspect some of it is) but I wonder if this aggressive approach is the best way forward to win hearts and minds for change?

As s LGPS activist for a number of years, I would also disagree that elected Councillors are “dominant” on London schemes. In fact I will say the opposite and it is professional advisors and Council Officers who are dominant (and in that order). That makes for more potential fiduciary conflicts.

It is illogical to complain of Councillors dominating schemes when at the same time arguing that their 4 year election time span is too short? This is also obviously not just a problem in London and is another argument for MNR to play a positive role like they do in the private sector schemes. MNRs are also more likely to provide continuity. Since I have been a MNR in my scheme in 1996 all the original Councillors, Officers, professional advisers, actuaries and fund managers I first worked with have long gone.

Scale is a crucial issue but it is also one for the private sector. Having 101 pension funds sharing £150 billion is inefficient but what about the hundreds of thousands of tiny private DB/DC schemes? What about the billions invested in contract schemes which have no independent oversight or beneficiary governance?

No recognition either that the way pension liabilities are calculated in the public and private sector schemes is  a complete nonsense due to low gilt yields. Yet they are driving repayment plans and long term asset allocations.

I also wonder about the tabloid references to “gold plated pensions” and “DB in the private sector is dead” (in press release)? The average pension for a women retiring from the Council in 2011 was £2780 per year? Hardly “gold plated”, also there are still 3 million workers in the private sector accruing DB pension benefit. As well as 25% of the LGPS who now work for private organisations?

Just because in the private sector it is now the fashion for many employers to turn their backs on their workers and are seemingly quite happy for them to retire and then die in poverty, doesn’t mean that it is a good thing for teacher assistants, cleaners, clerks and road sweepers to have the same fate?

The taxpayer of course has to subsidise these bad employers and pick up the bill for their poverty pension provision. This will have to change and the reintroduction of DB into the private sector is the only way it is going to happen.

I am also surprised to the reference about the discredited Channel 4 programme and the supposed link with LGPS and Council tax? I think I am right that 80-90% of Council income comes does not come from council tax e.g. Government grants, business rates, charges, fees etc. How is it therefore relevant to link LGPS contributions only to Council tax?

In short I am glad that this report has meant that long standing concerns about LGPS governance being fit for purpose are at long last out in the open. Yet it has ruffled feathers amongst those who are broadly supportive of change and has failed to take on board the argument that it is the democratic deficit that is the root source of most if not all evil in the LGPS.

Myners Report: 10 Years On

Last week the Financial Times ran a number of articles on the anniversary of the Myners Report which was published in March 2001. This report was written by Paul Myners, former fund manager, Chair of Marks & Spencer and of course, a Labour finance minister in the last government.

In 2000 Myner was asked to review institutional investments and whether investors were acting in the best interests of beneficiaries.  The poacher turned gamekeeper concluded they did not and made a number of recommendations.

I was quoted here in the article here about the role of auditors and my view that there had been despite Myners a "spectacular failure" by asset owners to stop the Banking crisis.  This was due (in part) to scheme fiduciaries not acting as owners of capital. 

While Myner’s report helped turn me from being a trade union observer on my pension scheme investment panel in 1996 (with no formal speaking rights -I did of course speak, no rights to attend all meetings, to question or to receive information) to being a full voting member of an investment committee. However, this is nowhere near enough.

The banking crisis showed that there is still grossly insufficient governance. Owners of capital (pension and insurance funds) failed to take their responsibilities of ownership seriously and allowed their money to be squandered and even stolen by the managers they paid to be “on watch” and look after their assets. How ridiculous that we continue to allow this? Not only did we lose big chunks of our savings but as taxpayers we then had to bail the banks out and are now suffering huge cuts in basic public services to pay for it.

The dangers of ownerless assets is well known, even Adam Smith warned about this over 200 years ago.  Part of the solution is that trustees and representatives should undertake an in depth management and scrutiny role with our funds.  I compared the role of pension trustees with that of scrutiny panels in local councils, who meet monthly, go on visits, have specialist staff tasked to support them, co-op experts to assist and can call witnesses to be questioned about their performance.

I also gave a plug in the interview to the  Association of Member Nominated Trustees (AMNT) which I think will play an important role in better governance.

The FT concluded with a quote from Paul “You don’t wash or service a rented car because you expect to give it back. I still get the impression that shareholders treat their holdings like a rented car. For the efficient use of capital, that attitude has to change.”

London UNISON Capital Stewardship Network

A quick post about last week’s meeting of UNISON member nominated representatives (MNRs) who sit on the pension or investment committees of London Local Government Pension Schemes (LGPS).

This network is supposed to meet every 3 months and our aim is to support MNRs and share best practice. I chaired the meeting. It can be quite tough at times if you are the only trade union representative on your local pension or investment committee. Especially when you want to question professional advisors or your fund managers.

We haven’t met for a while (my fault) but last week’s lunch time meeting was I think the best attended ever? We also had 3 new reps who have only just become MNRs.

We now have a “plan” (ish). At last week meeting we worked on a draft good governance charter for all London schemes. Which should set minimum standards for governance arrangements in all London LGPS’s?

On March 12 2-5pm there will be a regional briefing on the national LGPS governance campaign and the UNISON capital stewardship programme (see flyer). This will be presented by the UNISON National Officer on Capital Stewardship, Colin Meech. While we are also planning to hold a 2 day LGPS training course in London during April. Contact Paul Thompson at the regional office about attending the March 12 briefing.

There is still a lot to do – Some London schemes do not have any MNR’s at all, while in many cases it is hard pressed branch secretaries who are suppose to attend. Frankly I think they are too busy and what we really need is a small team of trained and properly supported MNR’s in each London LGPS. It works well in some schemes outside London.

From small acorns grow...

Some previous posts on related issues here, here, here, here