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Governance on my mind
July 30, 2012
This blogging malarkey is harder than it looks (although at least the spell checker recognizes the word ‘malarkey’, which makes life a little bit easier). Coming up with topics that are vaguely interesting is going to be a bit of a challenge I think, so for this instalment I thought I’d fall back on an old favourite – Pension Fund Governance.
Did heads just go down? Did I hear you groan? Hopefully not, since I think it’s a really interesting area of the LGPS set up, and have seen different approaches taken by different funds to managing governance arrangements over the years.
Just think about the ‘problem’ for a moment. How could you explain this concept of ‘Governance’ to someone who knows nothing about it? In my eyes, and with tongue very firmly in cheek, the explanation would look like this………..delivered over a drink I suspect…………
“Okay. In addition to the many facets of its role as public service provider to the local taxpayers, the Council – as administering authority – is also responsible for the running of a Local Government Pension Scheme Pension Fund. This is an almost entirely thankless task, whereby the authority oversees the management and operation of the Pension Fund. It’s up to each individual authority as to how it sets up the governance structure, but there are some Regulations that help inform the process.
A typical setup might look something like this:
1) start with some internal resource in the way of staff (it’s common for the Treasury Manager to take on board responsibility for the Pension Fund too), but don’t get carried away adding too many bodies;
2) throw in some ‘quasi-trustees’ in the shape of Elected Members . Yes, that means another Committee that the Council needs to set up and run;
3) agree terms of reference for the Committee that succinctly encapsulate all of the complexities and nuances of running a pension scheme in less than 40 pages;
4) arrange training and education for the quasi-trustees on an initial, and on-going, basis, accepting that it is very difficult to get them all in the same place at the same time to do this, and that they have varying levels of financial knowledge ranging from novice to expert;
5) persuade them to take time out of their lives to turn up to regular Pensions Committee meetings, sometimes held in the evening, to talk about pensions when the rest of the world is winding down for bed;
6) appoint some external advisors in the shape of consultants and actuaries who you don’t really want to pay much, who will tell you things in a complicated way that make it hard to understand;
7) ask the Committee to manage the on-going running of the Fund, including making decisions on the investment strategy for this multi million (or billion) pound vehicle, based on some complicated financial modelling that very few people truly understand; and
8) finally, one of the key common duties seems to be for the Pensions Committee to monitor, hire and fire investment managers on an infrequent basis, on relatively little information. This is the fun part of the job!
Oh, and local elections will complicate things in terms of regular turnover of the constituents of the Pensions Committee. Got all of that? Good.”
It’s fair to say I’ve never said the above to anyone in its entirety, over a drink or otherwise – although I have chatted about parts of it with Officers, Elected Members, investment managers and consultants alike.
Joking aside, you can probably see some of the main challenges to be addressed, and key decisions that need to be made by an administering authority in running an LGPS fund. This particular blog entry could set an Olympic Record for length if I went on to elaborate and discuss each of the points made above, so instead I’m going to go for the short version, and perhaps come back to some of the issues in later blog entries:
Resources – is it really the correct starting premise to have as few people as possible managing the investment arrangements of a multi-million (or billion) pound fund? Can this really be done, without running undue operation risk, whilst ensuring there is minimal cash leakage from the fund via the monitoring arrangements?
Pensions Committee knowledge – a huge burden is placed on Elected Members in terms of running the fund. They need to be properly supported, but at the same time they need to be open and honest about their current knowledge levels, so that appropriate training can be developed and delivered, to help them make better informed decisions.
External advisors – whilst external advisors are commonplace for most funds, a greater effort needs to be seen from them in terms of using less jargon (or explaining it at the point of use), and less in the way of assumptions made about the technical ability of the Pensions Committee. This last point will require some honest appraisal from the Committee too – but this can be done in a way that is confidential, supportive and constructive, rather than resulting in public embarrassment of individual Members.
Structure of regular Committee meetings – my main gripe with the current standard model. How many Committees spend most of their 3 hour meeting each quarter seeing investment managers? Where is the time in the agenda to discuss liabilities, funding level, investment strategy, pensions administration, Corporate Governance and ESG topics, business plan updates and training plan updates to name but a few possible other items? Investment managers are an important part of the pension fund management arrangements, but they should not monopolise Committee time. The typical annual governance budget of 12 hours needs to be spent wisely.
Hiring and firing managers – simply put, managers should not be fired on the sole basis of poor performance in the short to medium term. Why were they hired in the first place? Has anything changed in the key areas of People, Process and Philosophy since the time of initial appointment? Does the Committee understand what the manager does, in terms of investment, and what their role is with regards the overall investment strategy for the Fund?
Carefully thought out – and recently revisited! – Governance arrangements are critical to the long term success of the fund. Perhaps it’s time to sit down with a blank piece of paper, and think about what model would work best for you?
I'm busy working on my blog posts. Watch this space!