How local authority schemes manage political risk

The West Yorkshire Pension Fund experienced one of the unintended consequences of democracy this month when its chair Ian Greenwood lost his seat at Bradford City Council.

The loss of Greenwood will have a big impact on the Local Government Pension Scheme as he was involved in the ongoing negotiations on how to implement John Hutton’s proposals for a new LGPS in 2014.

Local council pension committees and panels must be made up by a majority of elected members. Consequently, there will always be the risk a number of members of the committee or the chair of the fund will be voted out by the electorate.

But local councils can take some steps to minimise the impact of the changes brought about by the electorate and ensure continuity at the pension fund, such as training council officers in pensions issues. These moves can also be used by non-public sector schemes to improve succession planning.

Mike Taylor, chief executive of the London Pension Fund Authority, said: “One of the best steps that can be taken is to ensure all the members of the local council investment committee are well trained so someone else can step into the shoes of the chairperson.”

Impact of big electoral swings

While losing the chair can be a major blow for a council’s pension fund advisory committee, more radical changes can also occur.

Geik Drever, director of pensions at the West Midlands Pension Fund, said she had worked at councils where the pension fund had a committee of five councillors and all five were replaced in one election.

To ensure the best possible continuity when there is a wholesale change of the advisory committee, it is important the council’s officers have sufficient training to support the new team.

Clare Scott, head of the Lothian Pension Fund, said the day-to-day management of her scheme was undertaken by council employees, so the local elections would not impact on how it was managed.

Taylor added: “Independent advisers can also help to protect continuity in this situation. But their roles are limited because all decisions have to be made by elected members.”

Once the new councillors have been appointed to the committees they too will have to be trained.

“We take the governance of the fund very seriously,” said Scott. “We carry out training for all members prior to the first committee meeting and ensure all those involved in governance receive training on a regular basis.”

One potential problem for local authority schemes is councillors who do not have sufficient knowledge and understanding relying too heavily on consultants.

But appointing councillors with the right background can help to minimise this risk.

Timing and frequency key

It is important councils employ common sense measures, such as ensuring major decisions about the pension fund are made at least a year after a council election, to ensure all the councillors will be up to speed.

When Hutton was compiling his report he found several governance issues needed to be tackled

Geik Drever, West Midlands Pension Fund

Many local councils have decided to have larger pension advisory boards to reduce the impact of any changes at election.

For example, the West Midlands Pension Fund has a 22-strong pension committee made up of 18 councillors and four non-voting members.

In England, metropolitan councils have greater protection from such wholesale changes due to having elections for a third of their councillors every year. This can help continuity.

There are hopes the issue of continuity at local council pension funds will be addressed by the implementation of Lord Hutton’s proposals in 2014.

“When Hutton was compiling his report, he found several governance issues needed to be tackled,” said Drever. “Hopefully the new proposals will try to address these.”

Possible solutions include hiring independent trustees as full-time members in addition to local councillors, as well as the full-scale separation of the pension fund from the local council.