In the public interest

As TPR takes over responsibility for the standards of governance and administration in the local government, NHS, teachers, civil service, armed forces, police, firefighters and judicial pension schemes, David Adams asks what the new oversight will mean for the schemes involved

Way back in March 2011 the Independent Public Service Pensions Commission, led by Lord Hutton of Furness, published its final report. Among other things, Hutton recommended independent oversight of administration and governance of public service pension schemes, to tackle issues relating to data quality and transparency that meant some schemes were managed without a detailed understanding of risks and costs. From April 2015, under the terms of the 2013 Public Service Pensions Act, The Pensions Regulator (TPR) will set standards for administration and governance of schemes within the Local Government Pension Scheme (LGPS) in England and Wales; and schemes for staff working in the NHS, education, the civil service, police and fire services, the judiciary and the armed forces.

It is not yet clear exactly how this will work in practice. The first thing to remember is the huge differences in size and structure of these schemes. LGPS is funded; the others are not. LGPS, fire and police schemes are locally administered and vary hugely in size, while others are national schemes, administered centrally. Research published by TPR in September 2013 highlighted good practice, including within LGPS, that had already set up governance boards and were increasing efficiency and reducing costs by co-operating to procure and/or share some administrative services. It also revealed poor governance, such as where police and fire service schemes are being run as “ancillary functions” of the local authority.


In general the changes proposed for administration and governance have been given a cautious welcome. The largest group of public sector schemes are those within the LGPS, which have around 4.7 million members, working for about 7,800 employers. Dr David Blake is professor of pension economics at Cass Business School, City University, director of the Pensions Institute (PI) and chairman of Square Mile Consultants. In 2012 he helped the PI conduct research into the investment governance of schemes within the LGPS.

“By and large investment governance was poor and I’m going to draw the inference that governance standards are also going to be reasonably poor, the reason being that you’ve got the taxpayer as a backstop,” he says. “The taxpayer underwrites it, so it doesn’t matter what governance and administration are like: the pensioner will get that benefit.”

Blake confirms that the PI was asked to research the London schemes in part because of the theoretical possibility that they might be merged into a smaller number of larger schemes to increase efficiency. This is not a universally popular idea. “What you would miss if you got rid of the locally administered schemes is local accountability,” says Barnett Waddingham senior pensions adviser Terry Crossley. “It’s certainly not something that the administering authorities are likely to be in favour of.”

In the meantime, many within the public sector would like TPR to provide more details on its current plans. “We’re not sure how the transfer of regulation from the Secretary of State to the regulator will come across,” says South Yorkshire Pensions Authority (SYPA) fund director John Hattersley. He stresses the need for TPR to understand the difference between LGPS and private sector schemes.

“We’re not a trust-based scheme, we’re statutory. Our covenant is a strong one and that is reflected in our asset allocation and benchmark strategy. Also, most LGPS funds have many employers – we have more than 250 –who you’ve got to liaise with. The other difference is that councillors are subject to elections every four years. That has implications for training and skills.”

Hattersley believes the emphasis this places on training means governance at some LGPS funds is superior to that found in many private sector schemes. He is concerned that the proposed changes could create additional bureaucracy and possibly some duplication of effort at the LGPS and TPR.

He is bemused and irritated by the suggestion that having the taxpayer as the ultimate guarantor of LGPS encourages lax governance or administration. “Why does working to a slightly different timescale make it any less efficient?” he asks. “The suggestion is that anyone running one of the LGPS funds isn’t conscious that any deficit falls on the taxpayer is fanciful. The LGPS is not poorly run. There are people with a particular political viewpoint, who focus entirely on costs and charges without asking about the level of service you get for that cost.”

Hattersley is waiting to assess further details of how the new arrangements will work, as is Lothian Pension Fund investment and pensions service manager Clare Scott. “I would guess the regulator will focus on codes of conduct and governance, so there’s going to need to be greater governance resource and costs for schemes,” she says. “It could be a good thing. But it’s going to put pressure on schemes to do things differently at a time when resources are stretched.”

Scott thinks schemes must focus on process improvements that will safeguard scheme members. “With career average schemes coming in there has to be a focus on data quality,” she continues. “We have over 100 employers in our scheme and it’s a big issue to get data from lots of employers in a timely fashion.”

Crossley believes TPR does appreciate the wide variety of schemes and of standards of governance seen currently across the public sector. “Some of the unfunded, centrally managed schemes have very little transparency, consistency and clarity,” he notes. “By contrast, the LGPS schemes are accountable locally and externally audited; and funding strategies and compliance statements have to be published locally. I think the regulator is going to be pretty content with the vast majority of LGPS.”

LGPS ‘crisis’

Not everyone has such a rosy view of the LGPS. A report by pensions analyst Michael Johnson, published in November 2013 by free market thinktank the Centre for Policy Studies, argues that the LGPS is in crisis and that its funds are “opaque, predominantly sub-scale, inefficient... with excessive costs and lax governance”. Johnson’s analysis highlights the greater efficiency achieved by some of the larger funds compared to the smallest. He estimates that a restructured LGPS could cut costs by about £860 million per year.

Barnett Waddingham partner and public sector practice area leader Graeme Muir describes the report as a mixture “of the good, the bad and the downright ugly – some facts, some fiction, some sensible stuff and some nonsense”.

Another industry observer with extensive experience of public sector pensions, who does not want to be identified, says criticisms of the LGPS in the report are based on “a recurrent and deliberate misconception about funding levels and deficit recovery plans”.

“Better fund authority transparency to improve local accountability is sensible, as is a strengthening of fiduciary duties,” he says. “But standardising valuation assumptions would seriously undermine the local accountability of fund authorities.”

Keeping calm

Elsewhere in the public sector, the new role proposed for TPR does not seem to be causing undue alarm. Royal College of Nurses (RCN) senior employment relations adviser Gerry O’Dwyer points out that the NHS Pension Scheme Governance Group, which contains representatives from employers, the unions and the Department of Health, has been promoting good practice in governance for some years.

National Union of Teachers (NUT) principal officer, pensions, Dr Nick Kirby, underlines the importance of good data. “Our concern is that members’ benefits are recorded accurately,” he says. “If TPR can have a role and insist that good data is kept ad infinitum, that’s fine by me.”

“We have always had the view that the civil service scheme has quite good governance,” says the Public and Commercial Services Union (PCS) pensions officer Christine Haswell. “We would expect the regulator to keep an eye on developments but not be particularly involved.”

As for the TPR itself, it says it will ensure it has sufficient staff resources to complete its new duties. “We have undertaken preliminary design work, which includes consideration of the size and nature of the team required,” says TPR head of public service pensions scheme regulation Bob Scruton. He says the regulator will publish a draft code of practice and regulatory strategy for consultation shortly. Only time will tell if the new arrangements are successful.

David Adams is a freelance journalist

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