The relationship between local government pension schemes and their host authorities has the potential to create conflicts of interest for those charged with managing both a council’s finances and the fate of its pension fund, experts say.
Article 8 of the Institutions for Occupational Retirement Provision I directive, issued in 2003, dictates: “Member states shall ensure that there is a legal separation between a sponsoring undertaking and an IORP”.
Concerns exist among some experts that section 151 officers, who are responsible for overseeing the council’s financial affairs, are subject to a conflict of interest when it comes to managing an LGPS fund.
A section 151 officer and the host authority must understand financial pressures that their peers are dealing with
Lynn Brown, Independent adviser
This conflict could arise, for example, where s151 officers are required to set contribution rates for employers within the scheme.
At a Hymans Robertson event on Wednesday, the consultancy examined a number of hypothetical models that could help avert conflicts between the objectives of councils and their schemes.
These ideas ranged from separating LGPS accounts from the rest of the council to a complete split between LGPS funds and their host authorities.
New ideas for LGPS governance
Ian Colvin, head of public sector benefit consultancy and governance at Hymans Robertson, observed that s151 officers may spend a morning designing the council’s budget for the next three years, followed by an afternoon with the LGPS establishing contribution rates for the same period.
“Many s151s understand and manage that conflict. But there is definitely an inherent tension in that set-up,” he said.
Colvin explored four possible models for future LGPS governance.
He first considered limiting changes to the existing model “with some beefed-up scheme advisory board guidance”.
This could cover advice around avoiding conflicts, the need for proper resourcing of the fund and a new perception of the fund as a “virtual separate entity” within the authority.
“I think the challenge to that would be [that] it’s not enforceable, it’s very easy to ignore,” he said.
A more substantial reform would lead to the creation of separate accounts, audits and annual governance statements for the fund, along with a separate pensions officer with control over resourcing.
Going further still, Colvin touted changes that would leave all LGPS functions delegated to a joint committee.
The responsibility for the fund would still remain with each administering authority, but a host authority could be employed in order to maximise efficiencies.
Colvin observed that both of these proposals would require changes to secondary legislation.
Finally, the consultancy’s most radical idea entailed the total separation of LGPS funds, which would require setting up new non-local authority entities with separate trustees.
The “nuclear option” of total separation, which Colvin said is “not on the table”, would leave “no democratic accountability” for LGPS, he said.
Finance directors must communicate fund strategy
Lynn Brown, former executive director of finance of Glasgow City Council and Strathclyde Pension Fund, is familiar with the balancing act required of an s151 officer.
Brown, who now acts as an independent adviser to the Greater Manchester Pension Fund, recognised the potential for a conflict of interest when setting contributions, but played down the significance of this threat.
“For me, this was always just one of the decisions as a finance director I had to take,” she said.
“All issues had the potential to cause difficulties with my peers, and were only able to be mitigated through clear, consistent and timely communication” of the pension fund’s strategy, she added.
Scottish LGPS funds already enjoy a degree of separation from host authorities, in that separate accounts are a statutory requirement.
“In the end, a section 151 officer and the host authority must understand financial pressures their peers are dealing with, and not seek to protect or give the fund immunity from those challenges,” she said.
Conflicts exist beyond s151 officers
Peter Clark, who is the staff and trade union representative on the Gloucestershire Pension Committee, agrees that conflicts of interest exist within the LGPS system.
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Gloucestershire Pension Fund uses Hymans Robertson as its actuary. Clark said he has witnessed an elected member suggest the use of an alternative actuary “whose assumptions will mean that perhaps employers won’t have to pay as large a contribution”.
“For me, that is a conflict of interest because they are all elected members and they are looking out for the individual interests of their employers” he said.
