The LGPS pooling deadline is fast approaching. Terry Crossley worries about minimalist legislation, the absence of evidence-based policy making and the lack of a cost benefit analysis.
Reflecting recently on the current state of play across the LGPS, in England and Wales, and the pooling of the scheme’s assets in a quest for savings and efficiencies, the imbroglio in 1990 involving the illegal delegation by administering authorities of investment decisions to their fund managers came to mind.
The then Department of the Environment was obliged to point out that such delegations were not permitted by the extant regulations. This provoked an outburst of faux indignation by many authorities to cover up their illegal stewardship. Happily, all was resolved in new regulations by early 1991 and the provision broadly continued through to 2016.
In contrast, in an era of minimalist secondary legislation, even where it has continued to be produced, there is a demand for less prescription from councils and interested parties.
It has become unfashionable to set out detailed legal requirements for most matters, including so it seems for fire safety, let alone deferred pay and local authority pension fund assets, within the context of a public service pension scheme which, by definition, must be prescribed in legislation.
It still came as a surprise when the pooling concepts were first announced that there was a lack of legislative specificity in the then chancellor’s Budget 2015 challenge.
Given the scale and nature of the pooling intentions, and the demanding timetable, it seemed an open-ended and aspirational vanity project.
The Red Book was marginally more forthcoming and the government indicated that it would invite local authorities to come forward with their own proposals to meet common criteria for delivery savings, and resources for infrastructure projects.
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This was unquestionably most un-Treasury like. But the centralist sting in the tail was that legislation would be introduced to compel those authorities who chose not engage with the challenge to pool investments. In due course, the so far untested direction powers in regulation 8 duly appeared in the 2016 investment regulations.
If the bespoke and unstructured nature of the pooling process, with no more than informal Treasury criteria about size and timing, was initially welcomed, it now transpires that a free for all in establishing pools has been allowed.
An uncharitable view might be that ministers had no idea about what framework to establish in regulations and it would take a year to introduce anyway? A lack of coherence and order has emerged, with insufficient attention to viable scale and with operational structures close to unrestricted in design, with ambitious target outcomes.
With a 2018 deadline, how is the escalating expenditure on staffing and consultancies, and critical effort to be justified? Goodwill and friendship will not achieve the net savings required to meet the high expectations of Treasury Chambers.
Cost risks are high as some pools seize the opportunity to establish new, highly paid posts, in freshly acquired office accommodation, in the belief that they are free from their authorities’ controlling influences.
What powers and finance are being used to pay for the new formats? As fund monies are the responsibility of administering authorities, are elected members authorising plans and expenditure? Is expenditure being independently audited and assessed for value for money?
Hopefully, self-interest and malfeasance are totally absent in this process although the National Audit Office in due course will need to assess the outcomes. Real concerns exist about the absence of any evidence-based policy making, nor the rigorous application any of cost benefit analysis; neither ever having been applied to Treasury’s LGPS pooling imposition.
The recent LGC investment seminar at Stratford upon Avon, attended by fund managers eager for an update on LGPS pooling, produced an inevitable enthusiasm from those engaged in the processes, and scepticism from others dubious about the savings outcomes and who see real sustainability issues for the LGPS. Fund managers are inevitably anxious, also, about their business prospects, particularly the smaller companies.
Serious LGPS watchers know that there remain a host of cost management and solvency issues to contend with, as well as the changing scale and nature of local authorities and their resourcing.
In pension policy terms, can public service pensions be guaranteed for the long term? Can defined benefit pensions continue? A recent debate about public sector pay saw much being made about pay across the sectors being equalised. Will this prompt a reform to defined contributions for the public sector schemes? What transpires if the pooling challenge fails to achieve its prospective savings? Does LGPS de-funding then become a realistic political option?
Concern emerged at the seminar about the respective status of constituent administering authorities and their pools. Wise heads correctly identified that the elected members of the designated authorities are legally responsible for the stewardship of the assets. An LGPS pool is in place as a delegated agent to manage and invest the assets in accordance with the investment strategy agreed by the pool’s constituent authorities.
Terry Crossley is an LGPS consultant.