William Bourne: Good Governance Project leaves ‘conflicts’ to be resolved

William Bourne reflects on how the Scheme Advisory Board’s Good Governance Project recommendations could be made more effective.

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Over the last 10 years governance has probably beaten even climate change and pooling as a subject of importance within the Local Government Pension Scheme (LGPS). Rightly so, because good governance raises the chances of good decision making. Poor governance risks worse outcomes, higher costs and potential for reputational damage.

The culmination is the Good Governance project launched by the Scheme Advisory Board (SAB), whose recommendations are due to be translated into statutory guidance in 2020.

They centre round mitigating the conflicts of interest embodied in the section 151 officer who, under the 1972 Local Government Act, has a duty to ensure LGPS funds are adequately resourced. The conflicts emerge when the interests of the fund clash with those of the administering authority. For example, when setting employer contributions or allocating costs for services provided.

There are broadly sensible proposals on training, resourcing and recruitment, but I will focus primarily on those for managing this conflict.

The conflicts emerge when the interests of the fund clash with those of the administering authority.

William Bourne

The key recommendations are for a “single named officer” (SNO) to be accountable for all pension related activities, for greater clarity on the management of potential and actual conflicts, and for the role of the pension fund committee (PFC) in decision-making to be reinforced. While these are all steps forward, I have three reasons to doubt whether they will deliver better outcomes where governance is poor.

Reporting lines

The first is to do with accountability. The SNO will be appointed under the authority’s scheme of delegation and may or may not be the section 151 officer. However, the reporting line is not clear.

In the event of poor performance, is it for the PFC or local pension board— who will be held accountable by the Pensions Regulator—to take action, or is it the authority who employs him? If the reporting line is to the section 151 officer, the conflict will not be removed.

To take it another step, if an authority wished to share an SNO with another fund to save costs, would the PFC have the right of veto?

Sharing

The second reason is to do with shared services, such as administration or the investment pools. Central government is keen to encourage shared services for reasons of efficiency, but they present an unmistakable governance problem: The participating funds are captive, frequently lacking the ultimate remedy of termination.

There is plenty of further potential for governance problems where a fund is a shareholder in a non-profit-making shared service. To name but three issues: inherent conflicts of interest for the fund (or between a fund and an authority) as client and shareholder; unwieldy or not even extant governing bodies; and the lack of any financial motive to be more efficient.

There is plenty of further potential for governance problems where a fund is a shareholder in a non-profit-making shared service.

William Bourne

This will not make it easy for funds to put together a meaningful matrix of responsibilities, as proposed. To take the example of administration, who is accountable for service levels? In the first instance, of course, the provider. But if they are failing, is it the PFC’s responsibility to effect change? They have little or no control and cannot terminate? Or, does it fall back on the authority, who will have contracted with the provider and as an owner may have an interest in its financial success?

IGRs

My third caveat is around the proposed Independent Governance Reviews (“IGRs”). There are a limited number of people with the required skillset. Frameworks may be more cost-effective but have the disadvantage of freezing the supply of potential providers at a point in time.

There is also the danger that the tender is over-specified and those appointed come from the same small pool of large firms who provide many other services.

Are Chinese walls sufficient if the same firm is providing internal audit services, perhaps to both a shared service and the fund, and the IGR? Would internal audit have the required understanding of the LGPS Scheme?

Good governance

At this stage, readers will be asking what good governance should look like. I will make one philosophical point and offer some practical thoughts.

The 1972 Act, Section 151, states “that every authority shall make arrangements for the proper administration of their financial affairs”. Does that require the pensions function to sit within finance? The section 151’s responsibilities for pensions are no different from those in relation to, for example, adult social care, but that does not sit under him. In my view, nor should pensions.

… too much still depends on good and collaborative behaviour by all parties in what are very complex arrangements.

William Bourne

On the practical side, here are some suggestions to reinforce the SAB’s good intentions on governance:

• Establish the SNO’s reporting line outside the Authority’s financial department to underline the separation;
• Word the forthcoming guidance as robustly as possible. Within it focus on how funds can manage shared services, because they are increasingly at the front line of delivering good outcomes for members;
• Insist on independent assurance that the KPI data provided by service providers is accurate;
• Encourage clarity and efficiency of governance and decision-making at shared service providers; above all, ensure the ultimate sanction to terminate them is in place.

This will all cost money but good governance does not come cheap.

I do not intend to disparage the work done, which will undoubtedly improve governance. I welcome the emphasis on the funds after so much time spent on investment pooling. But too much still depends on good and collaborative behaviour by all parties in what are very complex arrangements. We all wish to see this succeed but, sadly, it is not always the case.

William Bourne is Principal of Linchpin Advisory Limited and has roles with five LGPS Funds.