Pensions Committee Date: 15 th September Local Pension Board - Annual Report. pensions pensions pensions pensions pensions

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1 Pensions Committee Date: Local Pension Board - Annual Report Report of the Chair of the Local Pension Board Purpose of Report 1. The report is compiled to provide feedback to Pensions Committee on the work undertaken during 2015/16 by the Local Pension Board and to meet the legislative requirement for producing an annual report. Contact Officer: Ian Bainbridge, Head of Pensions, Tel pensions pensions pensions pensions pensions

2 Background 2. The Public Service Pensions Act 2013 introduced the requirement to have a Local Pensions Board to assist in the good governance of the scheme. 3. South Tyneside Council ratified the establishment of the Board with effect from 26 May The Board meets four times a year and consists of four Employer and four employee representatives. Membership and Attendance at meetings 4. The Membership of the Local Pension Board is Nicholas Wirz (Chair) Employee Representative (Unison) Jim Woodlingfield (V Chair) Employer Representative (Newcastle College Group) Cllr Doreen Purvis Employer Representative (South Tyneside Council) Martin Rooney Employer Representative (Lovell Partnership) Mick Brodie Employer Representative (North East Regional Employers Organisation) Chris Sharkey Employee Representative (Unison) Andrew McIntosh Employee Representative (GMB) (resigned and reported to Board Meeting in March 2016) John Pearson Employee Representative (GMB) 5. Attendance at the meetings has been high with an attendance rate of 72%. 6. Attendance at training events has been 81%. 7. A copy of the attendance record is attached at Appendix 1 Training 8. The Fund has offered a number of training opportunities for Board members. Where possible, training has been offered in conjunction with Pension Committee to develop and further relationships across the two groups. Final Page 2

3 9. Appendix 1, also shows details of the training events and conferences, which have been open to Board Members. 10. All members identify their training needs to the Fund and the training events are designed to accommodate these. Board members have assessed their knowledge/skills against the national standards set by The Chartered Institute of Public Finance and Accountancy. Work of the Local Pension Board 11. The Pension Board has established four working groups looking at: Member Services; Investment Strategy; Compliance with Legal Requirements; Legacy Issues. 12. The working groups have at least one employer and at least one employee representative on them. They report to the quarterly Board meetings. 13. To date, the working groups have submitted thirty written questions to the scheme administrator. The responses have informed Pension Board business and enabled the Board to discharge its statutory function. A list of these questions is attached at Appendix The Pension Board also responded in its own right to the Government consultation on the proposed Investment Regulations. This Response is at Appendix Working Groups are a standing agenda item at quarterly Board meetings. 16. The Local Pension Board has taken on the responsibility for the quarterly review and monitoring of the Pension Fund Risk Register. This is also a standing item on the agenda. 17. At the meeting of the Board in December 2015, the Local Pension Board considered a report on the Public Services (Social Value) Act This report was subsequently presented to Pensions Committee in June 2016 as part of its annual review of the Corporate Governance Policy. Final Page 3

4 Reporting Pension Board Work to the Pension Committee Costs 18. The minutes of Pension Board meetings are reported to the Pension Committee. In addition to this, the Board has written separately to the Chair of the Pension Committee in relation to a Government consultation on their proposed public sector employment measures in relation to exit payments. 19. Informal contact between the Board and the Pension Committee members has also taken place at joint training events. 20. The cost in the creation and implementation of the Board are included in the Pension Fund Governance Budget. For 2015/16 the costs were 15,200. This includes the costs of training, travel and the time of the Lead Officer for the Board. Forward plan for 2016/ The forward plan for 2016/17 includes: The 2016 Valuation Meeting legislative requirement on pooling; Improving data quality; Improving compliance by scheme employers; Ensuring pooling arrangements achieve accountability and good governance; Ensuring strength in employer covenants; Training plan. Financial implications 22. As outlined in the report Legal implications 23. The Fund is required to have a Local Pensions Board as set out in the Public Service Pensions Act 2013 which also requires the Fund to produce an annual report on the work of the Board. Final Page 4

5 Equalities implications 24. There are no equalities implications. Environmental implications 25. There are no environmental implications Human resources implications 26. There are no Human Resource implications Corporate landlord implications 27. There are no corporate landlord implications. Schedule of Appendices 28. The following Appendices are attached to this report Appendix 1 - Pension Board Attendance Record and Summary of Training and Conferences Appendix 2 Written Questions submitted by the Board Appendix 3 - Pension Board s Response To Government Consultation Final Page 5

6 Appendix 1 Local Pension Board Meetings Training Events 26th June nd October th December rd March 2016 Residential Training September 2015 LAPFF Conf. LGC Conf. Residential Training March 2016 Board Member Nicholas Wirz (Chair) Jim Woodlingfield (V Chair) N/A Cllr Doreen Purvis N/A N/A Martin Rooney N/A N/A Mick Brodie N/A N/A Chris Sharkey N/A N/A Andrew McIntosh N/A N/A John Pearson N/A Final Page 6

7 Appendix 2 Written questions submitted by the Board. What are the reasons for not taking steps to remedy the funding deficit sooner? What, if any risks do you foresee, which may threaten implementing the changes in the latest regulations, which are behind schedule due to the late publication of the Regulations? Whose role is it to monitor the compliance of the fund and its administration with the legal requirements it is subject to? What issues have arisen over the past two years that either amount to non-compliance or which have been flagged up as potential areas of non-compliance? What is being done to address any issues highlighted? What was/were the outcome(s) of any internal or external audit reports in the last two years with any recommendations? If there haven t been any audits, what are the internal control procedures? Can we have a sample of these internal control procedures which demonstrate that they are being followed? In relation to complaints received from members, how many were upheld and at what level (management, IDRP stage 1, IDRP stage 2, Pensions Ombudsman)? Of those complaints upheld, can you break down the complaints by issue? What mechanisms exist to ensure literature designed for scheme members is comprehensible and accessible? The Service Plan for at paragraph 20 gives a figure of 26, million pounds for investment management and custody fees. Does this figure include the fees associated with each individual transaction undertaken on behalf of the fund? - if not, how much are those fees? Final Page 7

8 The Service Plan for at paragraph 88 recommends "an increase in the proportion of the Fund to be invested passively to 27 percent". What are the reasons for limiting this proportion to 27 percent if it is regarded as a viable way to invest scheme funds? TheLPB is concerned that employers in default of their obligations often remain in default for long periods even after the scheme administrator has taken steps to try and achieve compliance. With reference to paragraphs of The Pensions Administration Strategy approved on 06 February 2015, does the scheme administrator have an enforcement policy? If it does, please supply a copy. If it does not, what are the scheme administrator's views on, eg, designing a policy which would, inter alia,: 1. Identify degrees of default?; 2. identify appropriate strategies for each degree of default? 3. specify a time scale for remedying a default;? 4. specify the escalation of enforcement action on each occasion where the previous action fails to achieve compliance? Can we be supplied with copies of correspondence between the scheme administrator and the most non-compliant employer beginning with the point it was decided to address the non-compliance? Scheme employers appear to be treated generously in relation to their contributions, with a deficit reduction period set at 22 years. Of more concern is the generous treatment being given to employers with a poor covenant as reported in the 2013 Valuation. Can you inform the legacy Issues working group what factors are taken into account when agreeing an employer contribution from an employer with a poor covenant? Do you consider the difference in employer contributions between employers with best and worst covenants reflects the difference in risk between the two? If not, what are the scheme administrator's reasons for allowing this? What steps are taken to verify the information supplied by employers on the strength of which their contribution level is set? Is TWPF currently fully following the new CIPFA guidance on annual reporting, specifically relating to Fund costs? If not, then what progress is being made towards implementing this? Final Page 8

9 Given that West Midlands L.G.P.F. s costs reportedly rose eight-fold once they applied the new methodology, what cost-impact is anticipated when the new CIPFA code is applied to our own Fund? A recent report suggested that if all L.G.P. Funds used the Government Actuaries Department discount rate of 3% above CPI, the total L.G.P.S. deficit would be cut from around 46 billion to around 27 billion. What would be the direct impact of such a calculation upon TWPF? In terms of the TWPF projected deficit, it has been suggested that Hymans Robertson use a particularly low Net Discount Rate, with the consequence that overly-prudent assumptions may underestimate the overall value of the Fund. In view of this, can it be explained to the Board what underlying assumptions will be applied to the 2016 Valuation? In relation to the most recent employer end of year returns, what was the number of errors per employer expressed as a percentage of the number of members that particular return relates to? In relation to the most recent employer end of year returns, what was the number of outstanding queries after the requested deadline had elapsed expressed as a percentage of the number of members that particular return relates to? In relation to the 50/50 scheme, please undertake an analysis of 50/50 membership across the fund broken down into salary bands. In relation to the 50/50 scheme, please undertake a comparative analysis across the fund comparing each employer s uptake of the 50/50 option with each employer s opt out rates. In relation to employers whom the scheme administrator is having to chase for outstanding matters, where the default exceeds 6 months, please inform us: Whom the administrator has been dealing with (name and address); What steps the administrator has taken to achieve compliance; The administrator s view on why compliance has not been achieved? Confirmation that the scheme administrator will file the scheme return to the Pensions Regulator on time and that all changes to the scheme s registrable information has been provided. Final Page 9

10 Appendix 3 Response dated 17 th February 2016 to consultation on the proposed revocation of the Local Government Pension Scheme (Management and Investment of Funds) Regulations 2009 Tyne and Wear Local Pension Board Department for Communities and Local Government Consultation Local Government Pension Scheme: Revoking and replacing the Local Government Pension Scheme (Management and Investment of Funds) Regulations 2009 Dear Sir or Madam We have considered the consultation papers. Summary of our position The government is consulting on a new set of investment regulations to support this pooling initiative. These include unprecedented powers of the Secretary of State into the investment policies of the scheme's funds. The LGPS Scheme Advisory Board and the Law Commission have requested that the government apply the Investment Regulations applicable to all other pension funds in the UK and the European Union. The SAB counsel opinion and the Law Commission believe that the government is in breach of the EU Directive 41/2003 Institutions for Occupational Retirement Provision (IORP). The UK government is denying scheme members their statutory right to have the pension funds invested in their best interests. Final Page 10

11 Commentary from the Board: "In terms of article 18 (which details how investments should be made in institutions for occupational retirement provision), Counsel makes some suggestions to strengthen regulations to ensure full compliance but reminds Administering Authorities that they should act in accordance with the Directive regardless of the current state of the regulations. The Board will be working with DCLG to ensure that future changes to investment regulations take on board this opinion to ensure that Article 18 is fully adopted, reflecting the legal views provided by the Law Commission and Michael Furness QC. " Law Commission Comment on the LGPS Investment Regulations in England and Wales: "We think two aspects of the LGPS Regulations could usefully be reviewed. First, in practice administering authorities consider themselves to be quasi-trustees, acting in the best interests of their members. We think that the same rules which apply to pension fund trustees in taking account of wider or non-financial factors will also be taken to apply to LGPS administering authorities. There is an argument that the IORP Directive requires this. However, we think that uncertainty on this point is undesirable and that the matter should be put beyond doubt. It would be helpful if the LGPS Investment Regulations made it clear that administering authorities must act in the best interests of pension scheme members". LGPS pension funds are there to pay benefits. It is why all pension funds in the European Union must be run in the interests of those expecting pensions or are being paid pensions. We have some real concerns at the unprecedented powers of intervention being proposed by the government over investment policy of the LGPS funds. Investment policy should be a matter for the scheme members and their decision makers, not for a government to intervene. This issue is of even more concern to us now that the government is requiring the pooling of our assets into funds over 25bn in size. There are clearly no plans to demand that those investing these giant funds must do so in the interests of scheme members. The government has instructed the 89 LGPS administering authorities to come up with proposals to create 'pools' of assets of no less than 25bn in size. Initial plans must be drawn up by the end of February 2016 and finalised by July Tyne and Wear Local Pension Board supports the pooling process but with qualifications. There should be scheme member (trade union nominated) representatives appointed to the pool governance structures. The pools will concentrate even more investment power in the hands of sponsoring employers. Without the balance of scheme member representation there is no guarantee that the assets will be invested in their interests. Final Page 11

12 These pools of assets, known as British Wealth funds (or Collective Investment Vehicles) will be expected to be cost transparent, reduce the costs of investing and invest more in infrastructure. The requirement for a full cost analysis of all of the LGPS funds is consistent with Tyne and Wear Local Pension Board's statutory obligation to assist our fund to ensure an efficient and effective system. We are not against pension funds investing in infrastructure. However, there has to be a clear analysis that recognises that investments should be made in the best interests of scheme members and that where there are potential conflicts of interest in the investment they are resolved in the interests of scheme members. LGPS funds have already been invested into Private Equity infrastructure funds which have mainly purchased existing Private Finance Initiative (PFI) contracts. However in many cases these PFI contracts are not in scheme member's interest, particularly where they involve the privatisation of their jobs. Additionally PFI contracts run through Private Equity funds are very expensive, with many funds charging costly management fees of 2% of asset value and take 20% share of profits, with many other hidden transaction costs.. Yours sincerely, Nicholas Wirz Chair Tyne and Wear Local Pension Board Final Page 12

13 background papers background papers background papers Local Pension Board The following is a list of the background papers (excluding exempt papers) relied upon in the preparation of the above report: Background Paper File Ref: File Location Public Service Pensions Act k/ukpga/2013/25/contents N/a Head of Pensions Office, South Shields Town Hall Local Government Pension Scheme Regulations N/a Head of Pensions Office, South Shields Town Hall Contact Officer: Ian Bainbridge, Head of Pensions Tel background papers background papers background papers