Governance and the LGPS

July 3, 2014

Gary Delderfield reports on a Department for Communities and Local Government consultation on draft regulations for governance of the Local Government Pension Scheme.

The DCLG is consulting on draft regulations which are intended to put in place the framework for the new-look governance arrangements for the Local Government Pension Scheme from 1 April 2015.

Issued under the Public Service Pensions Act 2013 (the “2013 Act”), the draft regulations are the first steps towards the implementation in the local government sector of Lord Hutton’s recommendations relating to the governance and administration of public service pension schemes.

Although most directly of interest to LGPS administering authorities, police and fire authorities may also wish to take note of the contents, since it seems likely that the final version of the LGPS regulations will be adopted as the model for the new police and fire sector governance arrangements (which similarly need to be in place for 1 April 2015).

The consultation runs until 15 August 2014.

New local and national boards

The draft regulations make provision for the creation of two new types of entity:

local pensions boards, whose role is to “assist” administering authorities to secure compliance with the LGPS regulations and other legal and regulatory requirements, and generally to ensure the efficient and effective governance and administration of the LGPS;
a national scheme advisory board (the LGPS Advisory Board) responsible for providing advice to the Secretary of State on the desirability of making changes to the LGPS, and to administering authorities and local pension boards in relation to administration and management of the LGPS and its funds.

Local boards are to be set up by administering authorities, whilst the LGPS Advisory Board (which already exists in shadow form) is directly established by the regulations themselves. The draft regulations will enable appointments to start being made to the new boards from 1 October 2014, with the boards required to be fully operational no later than 1 April 2015.

Membership of the new boards

Many of the provisions in the draft regulations simply reflect the minimum requirements imposed by the 2013 Act – for instance, the obligation to ensure that members of local pension boards or of the LGPS Advisory Board do not have a conflict of interest.

However, the draft regulations do put a little more flesh onto the bones of the 2013 Act when it comes to the make-up of the new local and national boards.

Specifically, as regards local pension boards:

As well as having equal numbers of member and employer representatives, the board must have at least two representatives in each category (four in aggregate).
Members of local authorities (ie. elected councillors) cannot be either employer or member representatives.
Member and employer representatives (in aggregate) must constitute the majority of the board. They must also have “relevant experience” and the “capacity” to represent members / employers (as appropriate); and the consultation paper makes it clear that this is separate from the requirement for pension board members to acquire appropriate “knowledge and understanding” of pensions matters.
There is no prescribed maximum number of members.

In relation to the LGPS Advisory Board:

The Chair of the Board is to be appointed by the Secretary of State.
The Chair must then appoint between 2 and 12 additional members (subject to the approval of the Secretary of State).
In contrast to the position at local level, there is no absolute requirement that there should be equal numbers of member and employer representatives on the Board, though equality of representation is a factor which the Secretary of State must take into account when considering possible appointments.

The local pension board as a section 101 committee

One of the more hotly debated points during initial discussions over the LGPS governance changes has been whether an existing pensions committee of an administering authority which is a local authority (ie. a ‘section 101 committee’, established under section 101 of the Local Government Act 1972) could also itself be the local pension board for its fund. The 2013 Act left this open as an option, and there are strong arguments on both sides of the debate.

The draft regulations take a middle line on this issue, by permitting administering authorities to choose this option only with the written approval of the Secretary of State. Approval may be made subject to conditions, and can be revoked if those conditions are breached or if the arrangement ceases to be appropriate. The consultation paper also identifies a number of difficulties which may be associated with this option.

Establishing a local pensions board

A related question is how a local pension board (if it is a separate entity) should be established. The draft regulations offer two possible alternatives: either the familiar s.101 regime, or the conferring of a wide discretion on the administering authority to determine matters such as procedures and voting rights for its own local pension board on a ‘bespoke’ basis. The consultation paper identifies certain pros and cons of each model.

Until this issue is resolved, the legal process as to how an administering authority will establish its pensions board remains uncertain.

Joint pension boards

Another contentious issue is whether administering authorities can ‘share’ a local pensions board, or whether there must be a one-to-one relationship, with a separate board for each fund. Again, the wording of the 2013 Act is broad enough to allow the option of having joint boards.

With the increasing focus on adopting collaborative ways of working within the local government sector, driven by the need to generate improved efficiency and economies of scale, several administering authorities have indicated that they would like the option of having a single local pensions board covering several neighbouring funds.

The consultation document invites views on how such an arrangement might work in practice. However, it also indicates that DCLG’s provisional view is that such arrangements should be the exception, to be permitted only where the administration or management of two or more funds is also shared.

Expenses

The cost of setting up the new boards (both locally and nationally) has also been an area of concern. The draft regulations confirm that:

The expenses of a local pension board are to be viewed as part of the administration costs for the relevant LGPS fund. This means that the administering authority will be able to require employers to contribute to those expenses under existing LGPS regulations.
The expenses of the LGPS Advisory Board are to be viewed as part of the administration costs for the LGPS as a whole, and are to be met by the administering authorities. The Board will determine each authority’s share based on the Board’s approved budget and the number of members in the relevant authority’s fund.

Comment

Administering authorities have been awaiting the issue of these draft regulations somewhat anxiously, in the expectation that the responsibility for creation of the new local pension boards would almost certainly fall on them (as the regulations in fact provide).

The draft regulations do not necessarily provide the level of detail that some authorities may have been expecting. In most respects, the draft regulations do little more than repeat the provisions of the 2013 Act.

Key issues such as how local pension boards are to be legally established, the use of an existing section 101 pensions committee to fulfil the role of the local pension board and ‘shared’ pension boards remain outstanding, meaning that we will need to await the outcome of consultation and the final regulations for clarification on these matters. Even with a shortened consultation period for the regulations (8 weeks, rather than 12), administering authorities will therefore have limited time to put their arrangements in place once the final version of the regulations is available.

It may also be that DCLG is planning to fill in some of the gaps by the issue of detailed guidance (as permitted under the draft regulations), perhaps on the pragmatic basis that guidance can be more easily adapted in the light of experience, as the new governance regime beds down. However, as yet, no draft guidance is available.

The draft regulations should allow administering authorities to start considering their options about the likely size and constitution of their local pension boards, even if definitive proposals cannot be made until the final regulations are available. However, the timescales and internal processes required to implement these changes by 1 April 2015 should not be underestimated, and administering authorities need to be putting project plans in place now to deliver this on time.

Gary Delderfield  is a pensions partner at Eversheds. He can be contacted on 0845 497 1786 or This email address is being protected from spambots. You need JavaScript enabled to view it..  