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investment pooling governance principles for LGPS Administering Authorities
86 INVESTMENT POOLING GOVERNANCE PRINCIPLES FOR LGPS ADMINISTERING AUTHORITIES
Published by: CIPFA \ THE CHARTERED INSTITUTE OF PUBLIC FINANCE AND ACCOUNTANCY 77 Mansell Street, London E1 8AN 020 7543 5600 \
[email protected] \ www.cipfa.org © October 2016 CIPFA ISBN 978 1 84508 470 7 Designed and typeset by Ministry of Design, Bath (www.ministryofdesign.co.uk) No responsibility for loss occasioned to any person acting or refraining from action as a result of any material in this publication can be accepted by the authors or publisher. While every care has been taken in the preparation of this publication, it may contain errors for which the publisher and authors cannot be held responsible. Apart from any fair dealing for the purposes of research or private study, or criticism or review, as permitted under the Copyright, Designs and Patents Act, 1988, this publication may be reproduced, stored or transmitted, in any form or by any means, only with the prior permission in writing of the publishers, or in the case of reprographic reproduction in accordance with the terms of licences issued by the Copyright Licensing Agency Ltd. Enquiries concerning reproduction outside those terms should be sent to the publishers at the above mentioned address.
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Foreword Good governance is a key a building block in any successful organisation. Getting it right allows the organisation to concentrate on the things that add value. For the LGPS, protecting members’ benefits and keeping the cost to taxpayers and employers to a minimum are key objectives. A strong governance structure will ensure that asset allocation decisions are made effectively and the best fund managers are selected. The creation of the new investment pools presents both a challenge and an opportunity. It will allow administering authorities to concentrate on effective strategic asset allocation while the pools focus on fund manager selection. Good communication will be key as employers and administering authorities will need to feel that they continue to influence decision making – it is after all they who will meet the cost of bad decisions. I welcome this guidance as a key piece of the LGPS jigsaw. I am grateful to Aon Hewitt for the hard work they have put into it.
Mike Ellsmore Chair of the CIPFA Pensions Panel
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Acknowledgements This guidance has been developed by Aon Hewitt, supported by Neil Sellstrom (CIPFA Pensions Technical Manager) on behalf of the CIPFA Pensions Panel. The Panel would like to thank Dave Lyons, Karen McWilliam and other colleagues at Aon Hewitt for their contributions to the guidance. The Panel would also like to acknowledge the role of Aon Hewitt as the publication’s sponsor, in helping to ensure that this key piece of guidance is available across the Local Government Pension Scheme. The CIPFA Pensions Panel would like to thank all those who took time to review the guidance during its preparation, including Clifford Sims of Squire Patton Boggs for his legal review of the guidance. Pensions Panel members are:
Mike Ellsmore (Chairman)
Mike Allen – London Pension Fund Authority
Paul Dale – London Borough of Merton
Geoff Dobson – Suffolk County Council
Geik Drever – West Midlands Pension Fund
Nick Eveleigh – Chelmsford Borough Council
Jeff Houston – Local Government Employers Pensions Committee
Nicola Mark – Norfolk Pension Fund
Paul Mayers – National Audit Office
Richard McIndoe – Glasgow Council
Chris Megainey – Department for Communities and Local Government
Graeme Russell (Vice Chairman) – Torfaen Borough Council
Trevor Salmon – Northern Ireland Local Government Officers’ Superannuation Committee
Mark Taylor – Audit Scotland
Chris West – Coventry City Council
Ian Williams – London Borough of Hackney
John Wright – Hymans Robertson
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Contents INTRODUCTION............................................................................................................................................................ 1 INVESTMENT POOLING ARRANGEMENT GOVERNANCE STRUCTURE.................................................................. 3 GOVERNANCE PRINCIPLES........................................................................................................................................ 5 DELIVERING GOOD GOVERNANCE IN LOCAL GOVERNMENT – CIPFA/SOLACE..............................................5 PRINCIPLES FOR INVESTMENT DECISION MAKING AND DISCLOSURE IN THE LOCAL GOVERNMENT PENSION SCHEME IN THE UNITED KINGDOM.........................................................................................7 ADAPTING GOVERNANCE TO INVESTMENT POOLING ARRANGEMENTS............................................................. 9 RECONSIDERING RESPONSIBILITIES AND UPDATING TERMS OF REFERENCE ...........................................9 RELATIONSHIP BETWEEN THE ADMINISTERING AUTHORITIES WITHIN AN INVESTMENT POOL..........11 REVIEWING KEY STRATEGIES AND OBJECTIVES TO BE ALIGNED WITH INVESTMENT POOLING............12 INFORMATION AND REPORTING REQUIREMENTS...........................................................................................14 KNOWLEDGE AND SKILLS....................................................................................................................................15 BUSINESS PLANNING...........................................................................................................................................16 RECOGNISING AND MANAGING POTENTIAL CONFLICTS OF INTEREST.......................................................17 RISK MANAGEMENT..............................................................................................................................................18 ANNUAL REPORT – ADDITIONAL ELEMENTS THAT SHOULD BE INCLUDED................................................21 CHIEF FINANCE OFFICER RESPONSIBILITIES..................................................................................................23 IMPLICATIONS OF INVESTMENT POOLING ON STAKEHOLDERS....................................................................24 SPECIAL CONSIDERATIONS DURING THE ESTABLISHMENT OF INVESTMENT POOLS ..............................25 CONCLUSION..............................................................................................................................................................31 APPENDIX A: PENSIONS KNOWLEDGE AND SKILLS FRAMEWORK FOR ELECTED REPRESENTATIVES AND NON-EXECUTIVES.............................................................................................................................................33 APPENDIX B: PENSIONS KNOWLEDGE AND SKILLS FRAMEWORK FOR PENSION PRACTITIONERS.............37
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Introduction CIPFA has produced this guidance to support Local Government Pension Scheme (LGPS) administering authorities in England and Wales in demonstrating best practice governance during the implementation of, and when participating in, LGPS asset pooling arrangements, more commonly referred to as investment pooling arrangements. There are 90 administering authorities which maintain and manage the LGPS pension funds in England and Wales. Although these pension funds continue to be separately managed and maintained by each administering authority, the administering authorities are now expected to pool investments to deliver reduced costs (through economies of scale), while maintaining overall investment performance and delivering the wider benefit of sharing best practice. Effectively, this means the appointment (and monitoring and deselection) of fund managers will be delivered through an investment pool operator on behalf of a number of co-operating administering authorities, while those administering authorities continue to have responsibility for determining their individual investment strategies including asset allocation. There are a number of criteria determined by the Department for Communities and Local Government (DCLG) which administering authorities were asked to evidence as part of their proposals for establishing their investment pooling arrangements, and which remain fundamental to the ongoing operation of the investment pooling arrangements. These are reproduced below. Headline criteria extracted from Local Government Pension Scheme: Investment Reform Criteria and Guidance (DCLG, November 2015) A. Asset pool(s) that achieve the benefits of scale The 90 administering authorities in England and Wales should collaborate to establish, and invest through asset pools, each with at least £25bn of Scheme assets. [At least one of the pooling arrangements has subsequently been granted special dispensation not to meet the £25bn criterion.] The proposals should describe these pools, explain how each administering authority’s assets will be allocated among the pools, describe the scale benefits that these arrangements are expected to deliver and explain how those benefits will be realised, measured and reported. B. Strong governance and decision making The proposed governance structure for the pools should: i.
at the local level, provide authorities with assurance that their investments are being managed appropriately by the pool, in line with their stated investment strategy and in the long-term interests of their members;
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ii. at the pool level, ensure that risk is adequately assessed and managed, investment implementation decisions are made with a long-term view, and a culture of continuous improvement is adopted. Authorities should also revisit their internal processes to ensure efficient and effective decision making and risk management, while maintaining appropriate democratic accountability. C. Reduced costs and excellent value for money In addition to the fees paid for investment, there are further hidden costs that are difficult to ascertain and so rarely reported in most pension fund accounts. To identify savings, authorities are expected to take the lead in this area and report the costs they incur more transparently. Proposals should explain how the pool(s) will deliver substantial savings in investment fees, both in the near term and over the next 15 years, while maintaining overall investment performance. Active fund management should only be used where it can be shown to deliver value for money, and authorities should report how fees and net performance in each listed asset class compare to a passive index. In addition authorities should consider setting targets for active managers which are focused on achieving risk-adjusted returns over an appropriate long-term time period, rather than solely focusing on short-term performance comparisons. D. An improved capacity and capability to invest in infrastructure Only a very small proportion of Local Government Pension Scheme assets are currently invested in infrastructure; pooling of assets may facilitate greater investment in this area. Proposals should explain how infrastructure will feature in authorities’ investment strategies and how the pooling arrangements can improve the capacity and capability to invest in this asset class.
At the time of writing, there are eight investment pooling arrangements proposed into which the DCLG expects administering authorities to be transferring liquid assets from April 2018. Accordingly the structures and governance of these investment pooling arrangements will need to be implemented before this date. These arrangements will have a fundamental impact on how LGPS pension fund investments are managed, including who makes decisions; and how these are actioned and monitored. Although much of this responsibility will move to the investment pool operator, it is critical that administering authorities continue to operate strong governance arrangements, and a key part of this will be the transformation to how they monitor the investment pooling arrangements. This guidance highlights some key elements that will need to be considered by administering authorities. It should be considered in addition to any supporting guidance issued by the DCLG. This guidance does not consider the establishment or operations of the investment pool operator, including where administering authorities establish their own management company to operate investment pooling arrangements and are therefore shareholders in such an arrangement. This clearly involves a number of complex legal issues, and appropriate governance arrangements will be needed. Separate legal advice should be taken in relation to what structures, processes and procedures need to be put in place to manage this.
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Investment pooling arrangement governance structure The means of delivering the investment pooling arrangements will not be identical across the different pools. Some groups of administering authorities will establish their own Financial Conduct Authority (FCA) regulated operator and others may rent such a provider. This operational entity of the investment pooling arrangements will be referred to as the ‘operator’ in this guidance. It is expected, and we believe this should be a requirement, that each of these operators will be overseen by (at least) a board or committee of individuals representing, collectively, the administering authorities participating in the investment pooling arrangement. In this guidance, we will refer to this as the ‘oversight committee’. The most likely option is that this would be a local authority joint committee which would consist of at least one representative from each administering authority (probably an elected member from the pension committee or another person with appropriate pension fund delegated powers of the administering authority). In addition, it might have co-opted members or observers such as:
scheme member representatives
employer representatives
advisor(s) – for example, an independent advisor or an investment consultant representing the administering authorities collectively.
There might be other subgroups, for example pension fund officers from administering authorities, providing information and guidance to the oversight committee and operator. A generic structure of how administering authorities will operate with an investment pooling arrangement is illustrated below.
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Administering authority PC or other decision makers
Multiple administering authorities Administering authority
Administering authority
Administering authority
Chief finance officer Other officers
Oversight committee
Possible sub-groups
Operator
Asset groups
Fund managers
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Governance principles Although there may be a number of different structures and operating practices in relation to the investment pooling arrangements, each administering authority should demonstrate strong governance in how it continues to manage its LGPS fund. However, the means by which it does this will need to evolve over time to ensure that it continues to be relevant for those responsibilities provided through the pooling arrangement. In reviewing their governance arrangements, administering authorities should have regard to existing statutory and professional governance guidance including the following CIPFA guidance:
Delivering Good Governance in Local Government: Framework (CIPFA/Solace, 2016)
Principles for Investment Decision Making and Disclosure in the Local Government Pension Scheme in the United Kingdom (CIPFA, 2012).
DELIVERING GOOD GOVERNANCE IN LOCAL GOVERNMENT – CIPFA/SOLACE This framework defines the principles that should underpin the governance of each local government organisation. These principles should equally apply to administering authorities in managing LGPS funds, and the framework does highlight that:
the principles are intended to be relevant to all organisations and systems associated with local authorities, including joint working arrangements and other vehicles that authorities may operate
it is up to authorities to put the framework into practice in a way that reflects their structure.
Much of the CIPFA framework adopts elements from the International Framework: Good Governance in the Public Sector (CIPFA/IFAC, 2014) including the definition of governance and principles of good governance in the public sector and how they relate to each other, as follows: Governance comprises the arrangements put in place to ensure that the intended outcomes for stakeholders are defined and achieved.
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The International Framework notes that: Principles A and B permeate implementation of principles C to G. The diagram also illustrates that good governance is dynamic, and that an entity as a whole should be committed to improving governance on a continuing basis through a process of evaluation and review. The International Framework also states that: To deliver good governance in the public sector, both governing bodies and individuals working for public sector entities must try to achieve their entity’s objectives while acting in the public interest at all times… Acting in the public interest implies primary consideration of the benefits for society, which should result in positive outcomes for service users and other stakeholders. These principles apply equally to management of the LGPS, including with investment pooling arrangements. In addition, administering authorities must be cognisant of the fiduciary responsibility to scheme beneficiaries and employers.
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PRINCIPLES FOR INVESTMENT DECISION MAKING AND DISCLOSURE IN THE LOCAL GOVERNMENT PENSION SCHEME IN THE UNITED KINGDOM This guidance reproduces the updated Myners principles, which should be adopted by all LGPS administering authorities in relation to the management of LGPS funds. It also provides the relevant regulatory background, guidance on relevant actions and pointers on good practice. The principles are as follows, together with some initial ideas in relation to how asset pooling applies to each, which are expanded on later Administering authorities in this guidance.
Effective decision making Administering authorities should ensure that:
decisions are taken by persons or organisations with the skills, knowledge, advice and resources necessary to make them effectively and monitor their implementation
those persons or organisations have sufficient expertise to be able to evaluate and challenge the advice they receive, and manage conflicts of interest.
Clear objectives
An overall investment objective(s) should be set out for the fund that takes account of the scheme’s liabilities, the potential impact on local taxpayers, the strength of the covenant for non-local authority employers, and the attitude to risk of both the administering authority and scheme employers, and these should be clearly communicated to advisors and investment managers.
should demonstrate a robust knowledge of asset pooling arrangements and be satisfied that the operator employs suitably qualified and experienced individuals.
Identifying and managing the additional conflicts of interest that can arise during the implementation of asset pooling is essential for administering authorities.
Administering authorities must clearly communicate their objectives to the asset pool operator.
Risk and liabilities
In setting and reviewing their investment strategy, administering authorities should take account of the form and structure of liabilities.
These include the implications for local taxpayers, the strength of the covenant for participating employers, the risk of their default and longevity risk.
Liability management remains a responsibility of the administering authority.
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The assessment of investment managers is, effectively, the assessment of the operator (for all pooled assets).
Performance assessment
Arrangements should be in place for the formal measurement of performance of the investments, investment managers and advisors.
Administering authorities should also periodically make a formal assessment of their own effectiveness as a decision-making body and report on this to scheme members.
Responsible ownership Administering authorities should:
Administering authorities should ensure that operators carry out these responsibilities.
recognise the FRC’s UK Stewardship Code, and ensure that their partners in the investment chain adopt this code
include a statement of their policy on responsible ownership in the statement of investment principles
report periodically to scheme members on the discharge of such responsibilities.
Transparency and reporting Administering authorities should:
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act in a transparent manner, communicating with stakeholders on issues relating to their management of investment, its governance and risks, including performance against stated objectives
provide regular communication to scheme members in the form they consider most appropriate.
Operators should demonstrate this and administering authorities should be satisfied that this is at an appropriate standard.
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Adapting governance to investment pooling arrangements These aforementioned frameworks and guidance should continue to be adhered to as LGPS administering authorities move to and eventually deliver elements of investment management through investment pool operators. It will be important for administering authorities to: 1. review their own internal governance arrangements 2. ensure any oversight committee meets best practice governance 3. ensure operators meet best practice governance, albeit an FCA regulated entity will also necessarily be subject to further requirements. The focus of the remainder of this guidance will be on 1 above, albeit there will be some references to 2 and many of the principles will impact on 3. As mentioned previously, this guidance does not, however, consider the governance requirements and implications on the administering authority of being a shareholder of the operator, ie relating to the creation of the new business.
RECONSIDERING RESPONSIBILITIES AND UPDATING TERMS OF REFERENCE Each council that is an administering authority will have decided how its pension fund functions are to be carried out and this is captured within that local authority’s constitution. In most cases, pension fund functions will be delegated by the council to a pension committee, and in some cases also to subcommittees, with some specific responsibilities possibly delegated to one or more senior officers. These functions will need to be updated to account for the new investment pooling arrangements. In particular, authorities should consider incorporating or updating existing provisions to incorporate the following as responsibilities of the pension committee (or equivalent):
selection, appointment and dismissal of an investment pooling operator to manage the assets (although these decisions are not expected to be a routine requirement, they are decisions that must remain at the local level, to ensure that the administering authority makes a formal decision to participate, or remain participating, in the pooling arrangements with the operator that is being proposed by the oversight committee)
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monitoring the performance and effectiveness of the investment pooling operator to ensure: ––
it is providing an effective means of delivering the investment strategy (eg types of assets and style of investment management)
––
it is meeting the objectives that have been set (including requirements in relation to responsible investment)
receiving and considering reports from the oversight committee, and maintaining an effective mechanism for making recommendations to the oversight committee
identifying and managing the risks associated with investment pooling
ensuring that appropriate measures are in place to monitor and report on the ongoing costs of investment pooling
ensuring that the responsible investment, corporate governance and/or voting policy is delivered
maintaining an effective, transparent and accountable process for determining who will represent the administering authority on the oversight committee.
Where existing functions are currently described in a more generic manner in a council’s constitution, the elements above may not all need to be incorporated in detail. However, administering authorities should review all existing wording in their constitution relating to pension fund management, such as investment strategy, to consider where it may need to be refined to fit better with the new investment pooling arrangements. As with all functions delegated to committees, subcommittees or officers, it is important to consider how urgent matters are dealt with. For example, a pension committee may be asked to make a decision on a specific matter by the operator or oversight committee within a short period of time. Administering authorities, where they do not already do so, may wish to consider having procedures in place to allow such decisions to be made, where appropriate to do so and with the proper process, within the timescales required. In addition, assuming that the oversight committee is being established as a joint local authority committee, each council should agree the establishment of the oversight committee and, as part of this, it would be expected that at least the following items would be formally approved:
terms of reference (ie the role and functions that the committee will undertake on behalf of each administering authority)
composition of membership (numbers of members and co-optees, terms of office, how members are appointed, reappointments and from where)
substitutes
voting
quorum
chair and vice-chair – terms of office and how they are determined
reporting requirements
attendance by others
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whether the committee can delegate matters and to whom eg procedure for determining matters of urgency outside committee meetings
whether the committee can establish working groups or subcommittees
procedure rules including elements such as: ––
standard agenda items and how work programmes are agreed
––
reporting requirements (eg to administering authorities)
––
code of conduct (including management of potential conflicts of interest)
––
knowledge and skills requirements
––
location of meetings.
It is important to consider any differences in practices for each administering authority participating in the investment pooling arrangement to ensure clarity on how the oversight committee should operate in relation to elements such as:
codes of conduct (members and officers)
access to information procedure rules
budget and policy framework procedure rules
financial procedure rules
contract procedure rules
media guidelines.
Councils may wish to delegate responsibility to, say, the pension committee, to approve matters relating to the ongoing functioning of the oversight committee, which may include some of the detail in relation to the points mentioned above. For example, determining who will represent that administering authority on the oversight committee might be a function delegated to the pension committee. The lists above are not exhaustive. Administering authorities should seek the advice of their monitoring officers in ensuring that all appropriate matters are considered, developed and properly approved in relation to the oversight committee.
RELATIONSHIP BETWEEN THE ADMINISTERING AUTHORITIES WITHIN AN INVESTMENT POOL It is important that the various administering authorities establish a robust and appropriate mechanism for managing their relationships with each other through their mutual interest in the investment pool. It may be necessary to establish mutually acceptable policies, for example in relation to:
responsible investment
corporate governance
voting rights
representation within the investment pool, and an effective means of influence over the operator
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approach to costs, both ongoing management costs and one-off transition costs
a fair and equitable policy with regard to the potential withdrawal of an administering authority from the investment pool.
These issues should be referred to in the terms of reference for the oversight committee (and may also be required to be addressed in any contractual agreement between the administering authorities and the operator). They are also considered further within the subsequent sections of this guidance. It is possible that common policies cannot be agreed in all circumstances (for example, tobacco). However, it is critically important that the collaborative ethos is maintained by having policies at a high enough level to capture areas where all administering authorities agree common ground in relation to how an operator should deliver and manage assets, while not taking away administering authorities’ rights to determine their own strategies on matters such as responsible investment, which the operator will also be responsible for delivering. It may be impractical for such differences to be incorporated into the common policies and administering authorities may wish to explore ways in which such local priorities can be maintained at the local level and implemented on a case by case basis in an effective and practical way by the operator or a specialist subcontractor. This, however, may lead to additional costs and so it will be necessary to agree who bears such costs and how.
REVIEWING KEY STRATEGIES AND OBJECTIVES TO BE ALIGNED WITH INVESTMENT POOLING The oversight committee will need a number of key strategies, policies and procedures, not all of which will be investment related. The most important ones that should be in place are:
governance policy – as with each administering authority, it is good practice to create a governance policy statement pulling together key information about the governance of the oversight committee
knowledge and skills – this is considered further later
conflicts of interest – this is considered further later
risk management – this is considered further later
communications and reporting – these could be two or more separate policies but should consider areas such as:
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––
how stakeholders and administering authorities are communicated with
––
expectations in relation to what reporting should be provided by the operator
––
how to deal with freedom of information requests
reporting of breaches – given each administering authority should have individual procedures in place regarding reporting of breaches of the law, it would be appropriate for a procedure to be agreed relating to the oversight committee’s role and responsibilities (see paragraph 245 and later paragraphs of Code of Practice No. 14: Governance and Administration of Public Service Pension Schemes (the Pensions Regulator, April 2015))
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an overall policy in relation to responsible investment, corporate governance and voting rights
policy on cost sharing, in terms of establishment, ongoing and transition costs
policy in respect of adherence to legislation, guidance and best practice
complaints and disputes procedures.
As a general principle we also recommend that these documents should include the following elements in addition to the main contents/purpose of the document:
introduction including any relevant legislation and guidance
aims and objectives in this area
what measurement and monitoring will be carried out in relation to those aims and objectives
the key risks relating to the strategy and how these risks are being managed and monitored
who was consulted on the drafting of the strategy or policy (or confirming that there was no consultation if that is the case)
when and how it was approved
the effective date of the strategy or policy
when it will next be reviewed
the roles and responsibilities of the key parties responsible for delivering the strategy (eg oversight committee, working group officers, the operator, fund managers, advisors etc).
In addition, each administering authority needs to review its own existing strategies, policies and procedures to ensure they are aligned to investments being pooled. It is expected that at least the following will need updating or expanding:
governance policy/compliance statement – incorporating any changes to the council’s delegated functions and including mention of the oversight committee
knowledge and skills – this is considered further later
conflicts of interest – this is considered further later
risk management – particularly if it includes information relating to key internal controls; otherwise the key changes may be focused on the administering authority’s risk register
statement of investment principles/investment strategy statement according to the prevailing investment regulations
treasury/cash management strategy, which will need to be updated in relation to the impact on investment balances, how sufficient cash flows are maintained and the transfer of cash to and from the operator or other parties.
Each administering authority should review all other strategies, policies and procedures that are in place to determine whether any changes need to be made as a result of the investment pooling arrangements.
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INFORMATION AND REPORTING REQUIREMENTS Administering authorities should expect to see the same level of detail, transparency and frequency of reporting from the operator that they currently receive from third party and internal investment management functions. Operators should provide a robust reconciliation of each administering authority’s investments with them, properly accounted for and audited, and clearly identifiable and attributable to each administering authority within the investment pool, even where these investments are unitised within the investment pool. Such reporting will need to be complete and detailed enough for periodic inclusion in the report and accounts of each administering authority’s fund. The operator should provide appropriate regular reporting within any prescribed and/or agreed timescales to enable administering authorities to adequately monitor their investments through the investment pool, to be able to produce their own statutory and monitoring reports and to be able to properly deliver their investment strategies at the local level. As a minimum this should include:
audited asset valuations
absolute investment performance, split by asset class, and on a net of costs basis
relative investment performance, both versus objective and versus benchmark, and on a net of costs basis
a degree of investment performance attribution, including key contributors, key detractors and whether investment performance is as should be expected given prevailing investment market conditions
an assessment of investment management costs including operator costs, fund management fees and transaction costs including full transparency of all costs and expenses associated with the investments
approach to responsible investing, environmental, social and governance aspects of investment, engagement with companies held and voting record
any other information required by the administering authority, pension fund committee and/or their advisors in order for the funds to be properly run and successfully deliver their investment strategies at the local level.
In addition to being investors in the investment pools, the administering authorities will also have an interest in the operation and ongoing development of their investment pools; therefore there should be separate periodic reporting on the business and operational aspects of the operator to each participating administering authority. This should include, as a minimum:
details of the operational structure of the operator
an audited summary of the financial aspects of the operation of the operator
a review of any material developments within the operator over the reporting period, including progress against the business plan (also see Business Planning below)
a forward-looking business plan for the operator over an appropriate period, ideally over a rolling three year period
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confirmation of adherence to any regulatory requirements of the specific investment pooling structure (and notification of any regulatory breaches)
declarations in respect of any actual or perceived conflicts of interest and how these are being effectively managed
details of how the safe custody of assets is ensured
if appropriate, confirmation that sufficient and appropriate insurances are in place to protect administering authorities in the same way that they would be in any similar investment arrangement with a third-party provider.
Such reporting is proposed as a minimum, and it is likely that administering authorities within investment pools will wish to agree further aspects of reporting, including regular contact between representatives of the operator and officers/pension committees on a mutually agreeable frequency and addressing specified criteria pertaining to investment performance. The oversight committee will also need to receive regular updates from the operator, much of which should be as outlined above, with a greater focus on the whole investment pooling arrangement. The agenda, reports and minutes of the oversight committee will also be key information that administering authorities should have access to on an ongoing basis, and some of which might become part of administering authority pension committee meetings. The administering authorities could request a regular (perhaps annual) report from the oversight committee to provide a means to formalise and summarise the work and views of the committee periodically. It is expected that oversight committees that are local authority joint committees will be public apart from exempt items. It is recognised that there are quite differing practices among existing administering authorities as to what is considered exempt or not, and therefore administering authorities and oversight committees are recommended to ensure that only truly sensitive or commercial items are treated as exempt.
KNOWLEDGE AND SKILLS With the introduction of investment pooling arrangements comes a need for a wider range of knowledge. Administering authorities should already have knowledge and skills policies in place in accordance with CIPFA’s Code of Practice on Public Sector Pensions Finance Knowledge and Skills (CIPFA, 2013), which embeds the requirements for the acquisition, retention and maintenance of appropriate knowledge through the following four key principles. 1. Organisations responsible for the financial administration of public sector pension schemes recognise that effective financial management, decision making and other aspects of the financial administration of public sector pension schemes can only be achieved where those involved have the requisite knowledge and skills. 2. Organisations have in place formal and comprehensive objectives, policies and practices, strategies and reporting arrangements for the effective acquisition and retention of public sector pension scheme finance knowledge and skills for those in the organisation responsible for financial administration and decision making. Page 15
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3. The associated policies and practices are guided by reference to a comprehensive framework of knowledge and skills requirements such as that set down in the CIPFA Pensions Finance Knowledge and Skills Frameworks. 4. The organisation has designated a named individual to be responsible for ensuring that policies are implemented. CIPFA has published the following Pensions Finance Knowledge and Skills Frameworks:
Technical Guidance for Elected Representatives and Non-executives in the Public Sector (January 2010)
Technical Guidance for Pensions Practitioners in the Public Sector (January 2010)
Local Pension Boards: A Technical Knowledge and Skills Framework (August 2015).
Administering authorities, when adopting the Code of Practice, should have either adopted these frameworks or established an alternative framework of knowledge and skills requirements. As a result of investment pooling arrangements, these will need to be expanded to encapsulate additional areas. Appendices A and B provide enhancements to the existing CIPFA frameworks as a result of investment pooling. In addition, any elected members or other individuals who are members of the oversight committee will need to have a more in-depth level of knowledge in relation to investment pooling arrangements, as will any officers involved in working groups or subgroups of the oversight committee. Each administering authority should review its knowledge and skills policies and procedures to integrate these or alternative additional competencies. Training plans should be developed to ensure these competencies are achieved and then maintained on an ongoing basis. Training plans should also incorporate specific, more specialist subjects which may be key areas of focus for the investment pooling arrangement during a given period, and as such, training plans should be regularly reviewed and updated. Clearly, for those administering authorities that are becoming shareholders in an operator, there will be a number of further competencies required in relation to the business management element of that relationship. A further detailed set of competencies will also need to be developed for those who are carrying out responsibilities for the operator (eg pension practitioners who are transferred to the operator).
BUSINESS PLANNING The principles for investment decision making and disclosure (otherwise referred to as Myners principles) published by CIPFA explicitly refer to this area as follows: The CFO should ensure that a medium term business plan is created for the pension fund, which should include the major milestones and issues to be considered by the committee. The business plan should contain financial estimates for the investment and administration of the fund, and include appropriate provision for training. Key targets and the method of measurement should be stated, and the plan should be submitted to the committee for consideration.
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The business plan should review the level of internal and external resources the committee requires to carry out its functions effectively and contain recommended actions to put right any deficiencies or to anticipate changing requirements in the future. Each administering authority should have a business plan setting out all planned activities in the forthcoming period (preferably at least a three year rolling period) and administering authorities will need to ensure they incorporate elements relevant to investment pooling within their business plan. The activities:
should be driven by objectives of the administering authority’s strategies and policies
will include activities driven by changes in overriding legislation and/or government guidance
will, in aggregate, drive and be consistent with the business plan of the operator itself (in so far as it relates to investment pooling matters).
Some elements could also be driven by the work of the oversight committee. Business plans should also include budgets and it will therefore be essential to receive estimates of ongoing costs from the operator, as well as incorporating any additional costs associated with the oversight committee or costs of investment pooling at administering authority level.
RECOGNISING AND MANAGING POTENTIAL CONFLICTS OF INTEREST Potential conflicts of interest have always existed for those with LGPS administering authority responsibilities as well as for advisors to LGPS funds. This simply reflects the fact that many of those managing or advising LGPS funds will have a variety of other roles and responsibilities, for example as a member of the scheme, as an elected member of an employer participating in the LGPS or as an advisor to more than one LGPS administering authority. Further, any of those persons may have an individual personal, business or other interest which might conflict, or be perceived to conflict, with their role in managing or advising LGPS funds. It is generally accepted that LGPS administering authorities have both fiduciary and public law duties to act in the best interest of both the scheme beneficiaries and participating employers. This, however, does not preclude those involved in the management of the fund from having other roles or responsibilities which may result in actual or potential conflicts of interest. Section 7 (5) of the Public Service Pensions Act 2013 defines a conflict of interest as “a financial or other interest which is likely to prejudice the person’s exercise of functions as a member of the board (but does not include a financial or other interest arising merely by virtue of membership of the scheme or any connected scheme)”. It is good practice to document within a policy how any such conflicts or potential conflicts are to be managed. Many administering authorities introduced such policies when local pension boards were introduced, given it was expected by the Pensions Regulator (see ‘Practice Guidance’ in the ‘Conflicts of Interest’ section of Code of Practice No. 14: Governance and Administration of Public Service Pension Schemes (the Pensions Regulator, April 2015)) and LGPS national Scheme Advisory Board (see paragraphs 7.40 and later Page 17
110 INVESTMENT POOLING GOVERNANCE PRINCIPLES FOR LGPS ADMINISTERING AUTHORITIES
paragraphs in the Scheme Advisory Board’s LGPS Guidance on the Creation and Operation of Local Pension Boards in England and Wales), and many opened them up to cover all pension fund matters (not just local pension boards). In particular, it should be recognised that the legal requirements for elected members to declare personal and pecuniary interests may not necessarily highlight a potential conflict in relation to pension fund matters. The introduction of investment pooling arrangements creates a range of additional roles that committee members, representatives, officers and advisors might have. Some examples include:
advisors of administering authorities who might bid for future work as part of the oversight committee or operator
officers who might apply for employment (or be transferred under TUPE) to an operator
elected members of an administering authority who utilise a specific fund manager looking for that fund manager to be adopted by the operator, in order to reduce their individual administering authority’s transition costs.
Accordingly it is appropriate to consider:
updating any existing conflicts policy to include examples of potential conflicts in relation to investment pooling arrangements
reminding all involved with the administration of the fund of the conflicts policy and highlighting the potential for new conflicts to arise in relation to investment pooling arrangements
asking for updated declarations where appropriate.
Similar arrangements should be put in place in relation to the oversight committee and any subgroups or subcommittees, etc.
RISK MANAGEMENT The benefits of an effective risk management approach include better decision making, improved performance and delivery of services, more effective use of resources and the protection of reputation. Administering authorities should already have risk management techniques in place, hopefully aligned with:
Managing Risk in the Local Government Pension Scheme (CIPFA, 2012)
the “Managing Risks” section of the Pensions Regulator’s Code of Practice No. 14: Governance and Administration of Public Service Pension Schemes, which is based on the legal requirements for a scheme manager to establish and operate adequate internal controls.
The CIPFA guidance recommends that each administering authority should have a risk management policy or strategy, which:
is a formal record of an organisation’s appetite for risk, its risk management structures, and its approach to risk management
sets out how an organisation intends to manage and treat risk.
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111 Adapting governance to investment pooling arrangements
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Both sets of guidance focus on the need to have processes and procedures in place to manage risk, a key part of which should be the risk register outlining the existing and proposed internal controls. They highlight the widely accepted model of risk management which portrays the process as a continuous loop that systematically looks at risks surrounding the organisation’s past, present and future activities.
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Use of investment pooling introduces a number of different risks for LGPS administering authorities, as well as potentially changing the magnitude of existing risks and how administering authorities might respond to them (ie their internal controls). Administering authorities should therefore review their risk registers in light of investment pooling and we highlight below some of the key new risks or changes that should be considered, as well as some of the associated internal controls. We consider these under the same headings as the existing CIPFA guidance.
Asset and investment risk
investments in the investment pool not delivering the required return
inadequate, inappropriate or incomplete investment expertise exercised over the pooled assets
failure of the operator itself, or its internal risks and controls
failure of corporate governance, responsible investment, or the failure to exercise voting rights according to policy
insufficient range of asset classes or investment styles being available through the investment pool Page 19
112 INVESTMENT POOLING GOVERNANCE PRINCIPLES FOR LGPS ADMINISTERING AUTHORITIES
systemic and other investment risks not being properly managed within the investment pool; for example appropriate diversification, credit, duration, liquidity and currency risks
asset transition risk and mitigation
failure to ensure safe custody of assets
risks associated with stock lending not being properly managed.
In the context of investment pooling we note that interest rate risk, either real or perceived (in terms of deficit calculation, for example), is not necessarily a risk that will be faced by all administering authorities within an asset pool, as different funds may utilise different actuarial bases in the calculation of their liabilities. Participating administering authorities and the investment pools should be aware of this in determining and delivering appropriate investment strategy solutions.
Employer risk
poor operator performance specifically resulting in poor investment returns, which could result in the need for increased employer contributions
employers not understanding the potential impact on them of investment pooling arrangements, as per the previous risk.
Resource and skill risk
employees resigning or inability to recruit due to working with the operator or other pooling arrangements
change in skill sets due to change in administering authority duties, meaning employees don’t have appropriate knowledge or skills
lack of knowledge of committee members, board members and/or fund officers relating to the investment pooling arrangement and related legislation and guidance.
Administration risk
data quality – inability to gather robust or timely information from the operator
third-party provider risk – failure of the operator.
Reputational risk
poor management of conflicts eg those involved in creating roles within the operator then being transferred to those roles
high setup and ongoing costs of the operator and of the management associated with investment pooling arrangements (or lack of reduction compared to current costs)
lack of transparency around investment pooling arrangements
lack of understanding by scheme members that investment pooling will not impact on their scheme benefits.
Regulatory and compliance risk
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lack of understanding of guidance relating to investment pooling and/or the legislation underpinning investment pooling
113 Adapting governance to investment pooling arrangements
failure to comply with existing legislation and objectives due to time and focus on investment pooling arrangements.
In addition to the need to review risk management by administering authorities, it will be necessary for the oversight committee to put in place its own risk management arrangements and processes. Many of the risks outlined above, and existing risks of administering authorities, will also apply to the oversight committee, but there may be other risks for it to consider, including, but not limited to:
inability to reach consensus on behalf of all the administering authorities participating in the investment pooling arrangement
insufficient resources to properly monitor the operator
insufficient knowledge and skills to be able to properly carry out the responsibilities of the oversight committee
inadequate information being provided by the operator
inadequate maintenance of an appropriate risk register
failure to agree and implement an appropriate complaints and disputes resolution policy.
Good risk management is an essential part of any successful organisation, and accordingly, the oversight committee should put in place its own risk policy, strategy and procedures to ensure ongoing and robust risk management.
ANNUAL REPORT – ADDITIONAL ELEMENTS THAT SHOULD BE INCLUDED Administering authorities should already prepare and publish a pension fund annual report in accordance with Regulation 57 of the Local Government Pension Scheme Regulations 2013 and having regard to CIPFA’s guidance Preparing the Annual Report: Guidance for Local Government Pension Scheme Funds (CIPFA, 2014), which has been adopted by the DCLG as statutory guidance. As a minimum, the following elements of a local authority’s annual report and accounts should incorporate information relating to the investment pooling arrangements. The following paragraphs should be read in conjunction with CIPFA’s guidance Preparing the Annual Report – Guidance for Local Government Pension Scheme Funds (CIPFA, 2014). A: MANAGEMENT AND FINANCIAL PERFORMANCE REPORT
scheme management and advisors – include name and contact details of operator
risk management – incorporate risks relating to the investment pooling arrangements
financial performance – information to include costs associated with the appointment and management of the operator including investment management expenses, as well as costs relating to the oversight committee.
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B: INVESTMENT POLICY AND PERFORMANCE REPORT
All of the areas in this section will need to clearly outline arrangements in relation to investment pooling, highlighting which areas of the portfolio are part of the investment pooling arrangement and which elements are excluded.
Where information is being provided in relation to assets that are both pooled and not pooled, it should outline the information in relation to each separately, for example: ––
planned versus actual asset allocation – within the operator and otherwise
––
responsible investment policies – how the administering authority, and respectively how the operator, are:
––
––
exercising voting rights
––
taking action to pursue responsible investment commitments
what action the administering authority, and respectively the operator, has taken to demonstrate compliance with the Myners principles.
The administering authority may also wish to include an annual report from the oversight committee (as previously referred to under Information and Reporting Requirements above). E: GOVERNANCE COMPLIANCE STATEMENT
This will be the updated version, including information relating to the oversight committee.
F: FUND ACCOUNT, NET ASSETS STATEMENT AND NOTES
In preparing this information, local authorities are required to account for pension funds in accordance with the CIPFA/LASAAC Code of Practice on Local Authority Accounting in the United Kingdom which includes comment that preparers have due regard to CIPFA’s Accounting for Local Government Pension Scheme Management Expenses (CIPFA, 2016). Administering authorities should expect all operators to be familiar with and provide information in line with that management expenses guidance as well as with the Code of Practice. Information will also need to be incorporated in relation to the oversight committee, such as training, administration and advisor costs.
I: STATEMENT OF INVESTMENT PRINCIPLES/INVESTMENT STRATEGY STATEMENT
With effect from 1 April 2017 (subject to confirmation at the time of writing), this will be the investment strategy statement and will need to include the administering authority’s approach to pooling investments.
K: ANY OTHER APPROPRIATE MATERIAL
Information relating to knowledge and skills and training.
Specific requirements – all information relating to assets should quite clearly state whether the assets are held via the operator or not.
Timescales Obtaining appropriate information from the operator to include within the fund’s annual report and accounts could impact on the timescales for preparing and signing off that report Page 22
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and accounts. Administering authorities should ensure the operator is given notice of all requirements and timescales well in advance.
CHIEF FINANCE OFFICER RESPONSIBILITIES Pension costs are a significant element of cost for all employers and local authorities. The CFO will need to stay close to the pension fund, monitoring performance and funding levels on a regular basis. Deficit recovery plans should be realistic and deliverable. CFOs should consider the following as key elements of their role in respect of the pension fund:
the CFO’s responsibility to be satisfied that the fund can meet liabilities when they fall due
focusing on the long-term nature of the fund
reviewing costs and performance and recommending changes to investment strategy
ensuring that committee members are trained and have the skills and abilities to discharge their role and can make informed decisions
ensuring that the fund’s overall governance arrangements are in line with best practice
ensuring the viability of the fund in the long term for employers
ensuring that the committee’s advisors are effective and reviewed from time to time.
The establishment of asset pools does not reduce the responsibilities of the CFO – it continues to be the CFO and their organisation who are accountable for their pension costs. The role of the CFO in local government is bound by specific legal responsibilities established both in legislation and in case law, not least the requirement under Section 151 of the Local Government Act 1972 to have responsibility for the arrangements that are put in place by the local authority for the proper financial administration of its financial affairs, which includes the pension fund. In addition, CFOs are subject to professional standards including those set down in CIPFA’s Standards of Professional Practice and Statement on the Role of the Chief Financial Officer in Local Government. CIPFA supplement Role of the CFO in the Local Government Pension Scheme provides further clarity on responsibilities for the management of LGPS funds in relation to the following principles:
The CFO in a public service organisation: ––
is a key member of the leadership team, helping it to develop and implement strategy and to resource and deliver the organisation’s strategic objectives sustainably and in the public interest
––
must be actively involved in, and able to bring influence to bear on, all material business decisions to ensure immediate and longer term implications, opportunities and risks are fully considered, and alignment with the organisation’s financial strategy; and
––
must lead the promotion and delivery by the whole organisation of good financial management so that public money is safeguarded at all times and used appropriately, economically, efficiently and effectively. Page 23
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To deliver these responsibilities the CFO: ––
must lead and direct a finance function that is resourced to be fit for purpose; and
––
must be professionally qualified and suitably experienced.
CFOs should remind themselves of how these principles apply in relation to the LGPS as detailed in the supplement, and ensure that they meet their responsibilities in relation to the development and management of the investment pooling arrangements. CFOs of administering authorities will need to ensure that they have established good communication channels with the oversight committee and the operator. CFOs of employer organisations will wish to ensure that the administering authority has in place good monitoring systems in relation to the pools. A key requirement will be each CFO ensuring that they have the requisite knowledge of investment pooling arrangements to allow them to carry out these responsibilities. The expected additional areas of knowledge are outlined in Appendix B.
IMPLICATIONS OF INVESTMENT POOLING ON STAKEHOLDERS Administering authorities should be mindful of the need for good communication to assist the funds’ stakeholders to understand the implications of investment pooling for them, or where there are no implications, to provide them with appropriate reassurance. In particular, administering authorities should be mindful of their fiduciary duty. The counsel’s opinion of Mr Nigel Giffin QC, obtained by the Local Government Association on behalf of the LGPS Shadow Scheme Advisory Board in March 2014 (Advice on Fiduciary Duty with Regard to the Investment of Local Government Pension Scheme (LGPS) Funds), concluded:
In managing an LGPS fund, the administering authority has both fiduciary duties and public law duties (which are in practice likely to come to much the same thing).
The administering authority does owe fiduciary duties, both to the scheme employers, and to the scheme members.
Employers and scheme members should be adequately assured of the proper management of assets within any pooling arrangement. Where an operator fails in its responsibilities, this could result in poor investment returns, higher investment-related costs (such as fund manager transitional costs) and/or additional administration charges. There is the possibility that additional costs will ultimately fall back on scheme employers through a need to increase the employer contribution rate at future triennial actuarial valuations, and this clearly could have a further impact on their stakeholders, such as the taxpayer. Although the scheme member should not be directly impacted in these circumstances, it is reasonable to assume they may feel worried if they hear about issues and do not understand the guaranteed nature of their benefits. Any additional costs or failure to achieve the expected investment return could impact on the long-term benefits of the scheme. There are two key elements to managing scheme members’, employers’ and other stakeholders’ expectations:
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117 Adapting governance to investment pooling arrangements
effective communication.
The remainder of this guide will assist on the first point. In relation to effective communications, administering authorities should consider the following ways of ensuring their stakeholders understand their investment pooling arrangements:
information in the annual report and accounts (see Annual Report – Additional Elements that Should Be Included above)
an area on their website including links to where further information can be found (annual report and accounts, oversight committee meeting information, pension committee meeting information, operator’s website)
information provided at employer forum and annual meetings
meetings with large employers
updates as part of scheme member and employer newsletters
keeping the pension committees (which often have scheme member and employer representatives) and local pension boards properly informed (and consulted with) on the development and ongoing operation of the investment pool.
Investment pooling arrangements have the potential to be extremely complex so it is critically important that communications are well presented and help stakeholders to understand what these arrangements are, how they are used in the administering authority and the impact they can have on the fund and its stakeholders.
SPECIAL CONSIDERATIONS DURING THE ESTABLISHMENT OF INVESTMENT POOLS The development and implementation of investment pooling arrangements will take a number of years. The ongoing transfer of assets will continue well beyond the initial timescale of beginning the transfer of liquid assets to operators from April 2018; the transfer of illiquid assets could be many years in the future so as to avoid unnecessary disinvestment costs. Many of the areas of best practice highlighted within this guidance require specific consideration during the transitional period. Some of this may have already been indirectly referred to but, for the avoidance of doubt, some areas for consideration at this time are examined further below.
Responsibilities and terms of reference A transitional governance structure should be put in place, with appropriately delegated functions and clear terms of reference. This should include, as a minimum:
a joint committee representing all administering authorities (which could be established as a shadow oversight committee)
working groups, many of which are likely to include administering authority officers.
It is critical that each administering authority documents, and all individuals understand, what decisions need to be made during the transitional period, and where and how those decisions will be made (subject to appropriate delegations having been made by the Page 25
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administering authorities). Decisions will range from high-level (and often fundamental) matters to elements of detail. The following are examples (not intended to be exhaustive) of areas to be considered:
whether or not to proceed with the asset pooling arrangement
the type of operator (if being built)
who will be appointed (if an operator is being rented)
the governance structure – at the operator and external to the operator
the staffing structure, pay, terms and conditions and pension arrangements
how and when existing assets will transfer
how transitional, operational and other costs will be split between administering authorities
what standard reporting will look like
complaints procedures
termination procedures
service standards.
Information and reporting requirements During the implementation period, the pension committee and key decision makers at each administering authority should be fully engaged with the implementation and, in order to achieve this, they should be provided with at least the following:
regular updates on the project plan at a level to help them understand what is being done, by whom and whether planned progress is being achieved. This should include the plan going forward, including what information will be provided to the pension committee (eg key decisions) and when, as well as all key items on the administering authority’s business plan
sufficient information to monitor against the agreed budget for implementation, including information where the budget needs to be reviewed and information on over and underspend
more detail, papers and information as they are being developed, for example, principles on sharing costs, structure information, etc. Much of this will be required to support decisions that need to be made by each administering authority.
Due to the major risks involved in the investment pooling implementation project, pension committees should expect more and/or longer meetings (as well as additional training sessions) to allow sufficient time to deal with business as usual items, in addition to the many agenda items relating to investment pooling. The joint committee established during the implementation period should be provided with similar information, and much of the information will be shared between the joint committee and administering authorities as part of the ongoing decision making process.
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Knowledge and skills Administering authority officers and pension committee members involved with the development and decision making during the implementation of investment pooling arrangements will need to develop their knowledge of investment pooling to allow them to carry out their responsibilities to the appropriate standard. They should achieve a robust level of knowledge, not only in relation to any preferred approaches or routes to be taken, but fully understanding all options available during the implementation period. This should involve:
having appropriately detailed knowledge including making good use of advisors, particularly those with experience of developing investment pooling arrangements, to help develop the most appropriate options in a robust manner
identifying and attending appropriate training sessions, including national conferences and additional training sessions at administering authority and/or pool level.
regularly speaking to colleagues in other investment pooling arrangements that are already established or are in the process of being established.
Specifically, those with responsibility for decision making should be satisfied that they:
are receiving detailed reports and information, outlining options and with clear recommendations (with reasons for those recommendations)
have advisors who are not involved with the investment pooling project, to provide independence when it comes to challenging and/or supporting the recommendations.
Business planning Given that each administering authority will be investing significant resources in establishing investment pooling, it is important that implementation projects are properly managed, each with allocated project management resources and professional advice, including but not limited to legal, investment, governance, and (where an operator is being built) expert advisors on establishing such businesses who are used to dealing with the Financial Conduct Authority’s authorisation processes. The key elements of the implementation project plan should feed into individual administering authorities’ business plans, and these should consequently feed into forward plans for pension committee meetings. Budgets within business plans should also include expected costs relating to the establishment of investment pooling arrangements, including those costs that will be shared by all administering authorities in a proposed arrangement. These budgets should be subject to ongoing monitoring during the period of implementation (as is the case with all budgets). During this transitional period, a major time commitment will be placed on existing officers, and to some degree, on pension committee members. Administering authorities should best consider how this will be managed. It is difficult to backfill or recruit temporary staff to assist with this, and therefore administering authorities may need to consider some or all of the following (including the consequential impact on budgets):
prioritising or delaying other administering authority objectives and plans where it is not disadvantageous to do so
identifying additional support (temporary staff or consultants) Page 27
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working collaboratively, within and across pooling arrangements, to minimise inefficiencies in development.
Administering authorities should clearly identify the impact the pooling project has on existing business plans, including the day-to-day operations of fund management, and highlight through business plan updates where there is likely to be an impact so this can be considered by pension committees. Each administering authority should also already be identifying and recording breaches of the law, and these, together with other service standards and targets, should be monitored carefully to understand any impact the project may have on day-to-day operations.
Potential conflicts of interest The principles and best practice previously referred to in relation to potential conflicts of interest equally apply during the period of implementation, with the need for administering authorities, the joint committee (or equivalent) and subgroups or working groups to have (and follow) a policy on managing potential conflicts of interest. This will include declarations of actual and potential conflicts of interest being completed and monitored throughout the project. There are two potential conflicts of interest during the implementation period highlighted below, although again it should be noted that this is not exhaustive.
Some officers of administering authorities may become employed or seconded to work as part of the operator or in an alternative role relating to the investment pooling arrangement, and this role may be on a higher benefit package compared to an existing position. This is a particularly personal and sensitive issue, but the nature of the potential conflict means it must be highlighted and managed appropriately. In potential conflicts of this nature, it is insufficient simply to record the potential conflict; it is important that it is highlighted at all stages where the potential conflict might be relevant, as a minimum at the beginning of any such meetings, including informal meetings.
Similar conflicts will apply to advisors, for example if an investment pooling arrangement might result in the appointment of advisors to the operator or oversight committee, whether as part of the implementation period or on an ongoing basis.
Risk management There are a number of specific risks that will need to be identified and managed (where possible) during the implementation period. Many of these have similarities with those already identified in the risk management section previously, albeit they should be viewed from an implementation period perspective. Administering authorities and any joint committee or working groups relating to the implementation should review their risk registers regularly throughout the implementation project. Particular risks we would expect to be scored highly during the implementation period include:
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resource and skill risk: ––
employees resigning or inability to recruit due to working with the operator or other pooling arrangements
––
insufficient resources available to properly allocate time to the implementation of the investment pooling arrangement
121 Adapting governance to investment pooling arrangements
––
change in skillsets due to the change in administering authority duties, meaning employees don’t have appropriate knowledge or skills
––
lack of knowledge of committee members, board members and/or fund officers relating to the investment pooling arrangement and related legislation/guidance
reputational risk: ––
poor management of potential conflicts eg those involved in creating roles in the operator then being transferred to those roles
––
high setup costs of the operator and of the management associated with investment pooling arrangements
––
lack of transparency around establishment of investment pooling arrangements
––
lack of understanding by scheme members of the impact of investment pooling on their scheme benefits
regulatory and compliance risk: ––
lack of understanding of legislation relating to investment pooling resulting in substandard implementation
––
failure to comply with existing legislation and objectives due to time and focus on implementation of investment pooling arrangements
––
inability to meet DCLG pooling criteria due to proposed structure and policies of pooling arrangements
asset and investment risk: ––
transition risk
––
manager selection risk (ie the operator failing to appoint appropriate managers)
––
changes by administering authorities to existing fund managers during the implementation stage (ie not driven by the pooling arrangements, and so complicating implementation plans)
––
pressure on administering authorities to adapt the investment strategy to simplify the establishment of the investment pooling arrangement
employer risk: ––
employers not understanding the impact on them of investment pooling arrangements.
Annual report – consideration of additional elements that should be included The annual report should include an explanation of this major change in the management of assets and how this is being implemented. Comment is also likely to be required in relation to increasing costs during the period of implementation.
Chief finance officer responsibilities As mentioned previously, CFOs should remind themselves of how their principles apply in relation to the LGPS and ensure that they meet their responsibilities in relation to the development of the investment pooling arrangements.
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Implications of asset pooling on stakeholders Administering authorities should ensure that there is appropriate communication with scheme members and employers, as a minimum, during the period of implementation. Special articles in newsletters and sessions at employer forums or annual meetings will be essential to ensure that stakeholders understand the impact of investment pooling and how and when the new arrangements are being implemented.
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Conclusion The introduction of asset pooling arrangements presents both a challenge and an opportunity for administering authorities. It is hoped that this guidance informs authorities with a view to ensuring robust governance arrangements are in place from the commencement of asset pooling and on an ongoing basis.
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Appendix A PENSIONS KNOWLEDGE AND SKILLS FRAMEWORK FOR ELECTED REPRESENTATIVES AND NON-EXECUTIVES Additional competencies relating to asset pooling are shown in italics in the table below. Pensions legislative and governance context
General pensions framework A general awareness of the pensions legislative framework in the UK. Scheme-specific legislation An overall understanding of the legislation specific to the scheme and the main features relating to benefits, administration and investment. An awareness of the Local Government Pension Scheme (Benefits, Membership and Contributions) Regulations 2007 and Local Government Pension Scheme (Administration) Regulations 2008 and their main features. An appreciation of LGPS discretions and how the formulation of the discretionary policies impact on the pension fund, employers and local taxpayers. A regularly updated appreciation of the latest changes to the scheme rules. Knowledge of the role of the administering authority in relation to the LGPS. Pensions regulators and advisors An understanding of how the roles and powers of the Pensions Regulator, the Pensions Advisory Service and the Pensions Ombudsman relate to the workings of the scheme. General constitutional framework Broad understanding of role of pension fund committees in relation to the fund, administrative authority, employing authorities, scheme members and taxpayers. Awareness of role and statutory responsibilities of treasurer and monitoring officer. Pension scheme governance An awareness of the LGPS main features. Knowledge of the Myners principles and associated CIPFA and Solace guidance. A detailed knowledge of the duties and responsibilities of committee members. Knowledge of the stakeholders of the pension fund and the nature of their interests. Knowledge of consultation, communication and involvement options relevant to the stakeholders.
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Investment Pool Broad understanding of the structure, operation and purpose of the investment pooling arrangements, including the structure of the relationship with the other participants within the pool. Appreciation of the regulation, best practice and guidance related to investment pooling and the delivery of the investment objectives of the administering authority/pension committee by their chosen investment pool. Appreciation of the boundaries under financial services law and where carrying on investment activities requires FCA authorisation. Understanding of the interaction between the administering authority, the pension committee, the investment pool operator, investment pool oversight committee and other parties relating to the investment pooling arrangements; in particular reporting requirements, influence and accountability. Understanding of the statement of investment principles or investment strategy statement and the investment pool’s interpretation and expected delivery of those investment objectives. Pensions accounting and auditing standards
Awareness of the Accounts and Audit Regulations and legislative requirements relating to the role of the committee and individual members in considering and signing off the accounts and annual report. Awareness of the role of both internal and external audit in the governance and assurance process.
Financial services procurement and relationship management
Understanding public procurement Understanding of the background to current public procurement policy and procedures, and of the values and scope of public procurement and the roles of key decision makers and organisations. A general understanding of the main public procurement requirements of UK and EU legislation. Supplier risk management Awareness of the nature and scope of risks for the pension fund and of the importance of considering risk factors when selecting third parties. Investment pool Awareness of the nature of the relationship with the investment pool parties and an understanding of: the extent of influence over the investment pool operator and oversight committee the terms for terminating a pooling agreement; and guidance on the requirement to pool investments.
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Investment performance and risk management
Total fund Understanding of the importance of monitoring asset returns relative to the liabilities and a broad understanding of ways of assessing long-term risks. Performance of advisors Awareness of the Myners principles of performance management and the approach adopted by the committee. Performance of the committee Awareness of the Myners principles and the need to set targets for the committee and to report against them. Performance of support services Awareness of the range of support services, who supplies them and the nature of the performance monitoring regime. Performance of the investment pool Awareness of the Investment Regulations and the requirements for monitoring investments. Understanding of the administering authority and pension committee investment strategy requirements of the investment pool and how to effectively monitor the delivery of the investment strategy.
Financial markets and Investment strategy products knowledge Awareness of the risk and return characteristics of the main asset classes (equities, bonds, property). Understanding of the role of these asset classes in long-term pension fund investing. Financial markets Understanding of the primary importance of the investment strategy decision. A broad understanding of the workings of the financial markets and of the investment vehicles available to the pension fund and the nature of the associated risks. An awareness of the limits placed by regulation on the investment activities of local government pension funds. Investment pool Appreciation of the investment pool operator’s approach to pooling and delivering access to the different asset classes and/or investment funds. Understanding of which assets and investments may sit outside of the investment pool, and their nature and characteristics.
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Actuarial methods, standards and practices
Valuations Knowledge of the valuation process, including developing the funding strategy in conjunction with the fund actuary, and inter-valuation monitoring. Awareness of the importance of monitoring early and ill health retirement strain costs. A broad understanding of the implications of including new employers into the fund and of the cessation of existing employers. Outsourcing A general awareness of the relevant considerations in relation to outsourcing and bulk transfers.
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Appendix B PENSIONS KNOWLEDGE AND SKILLS FRAMEWORK FOR PENSION PRACTITIONERS Additional competencies relating to asset pooling are shown in italics in the table below. Chief finance officer (head of finance/finance director/Section 151 officer) Pensions legislative General pensions framework and governance A general awareness of the pensions legislative framework in the UK, particularly: context Pensions Act 1995 Pensions Act 2004 Occupational and Personal Pension Schemes (Disclosure of Information) Regulations 2013. Scheme-specific legislation An overall understanding of the legislation specific to the scheme: Local Government Pension Scheme (Benefits, Membership and Contributions) Regulations 2007 Local Government Pension Scheme (Administration) Regulations 2008 Local Government Pension Scheme (Management and Investment of Funds) Regulations 2009 Local Government Pension Scheme Regulations 2013. Understanding of how the scheme interfaces with other private and state pension provision. Tax legislation A general awareness of pension scheme tax legislation and the UK pension scheme reporting framework, in particular: Finance Act 2004 related statutory instruments. Pensions regulators and advisors An understanding of how the roles and powers of the Pensions Regulator, the Pensions Advisory Service and the Pensions Ombudsman relate to the workings of the scheme.
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Investment pool Should possess an understanding of the structure, operation and purpose of the investment pool operator, oversight committee and other organisations which are part of the investment pool arrangements, including the structure of the relationship with the other participants within the pool. Should possess an understanding of the regulation, best practice and guidance related to investment pooling and the delivery of the investment objectives of the administering authority/pension committee by their chosen investment pool. Should possess an understanding of the interaction between the administering authority, the pension committee, the investment pool operator and investment pool oversight committee; in particular reporting requirements, influence and accountability. Should possess an understanding of the statement of investment principles or investment strategy statement and the investment pool operator’s interpretation and expected delivery of those investment objectives. Pensions accounting and auditing standards
Awareness of the relevant pensions accounting standards as they apply to the scheme and to the employer: Pensions SORP FRS 17 (IAS 19) iFReM. Understanding of the approach to pensions external audit as set down in APB Practice Note 15. Understanding of the role of internal audit in the governance and assurance process. Awareness of and compliance with the CIPFA statement of expertise as it applies to: leadership and strategic management governance, ethics and values financial and performance reporting audit and accountability strategic and operational financial management partnerships and stakeholder relations change, risk and project management.
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Financial services procurement and relationship management
Understanding public procurement Knowledge and understanding of the background to current public procurement policy and procedures. Understanding of the values and scope of public procurement and the roles of key decision makers and organisations. Able to understand and analyse the impact of procurement policy and government initiatives on procurement. Understanding of the significance of the financial accountability cycle for procurement policy and practice. Supplier risk management Awareness of the nature and scope of risks for the organisation. Able to assess the sources of supplier risk and the likely impact of those risks upon the organisation. Able to plan and implement an appropriate risk management process in order to protect the organisation’s interests. Understanding of how supplier appraisals, pre-qualification of suppliers and contract monitoring can help to mitigate risks. Able to develop systems for testing risks and monitoring them accordingly. Understanding of how to apply risk management principles to various procurement and supply management scenarios. Able to apply a range of techniques to mitigate risk proactively and to reduce the consequential losses in the instance of a risk event occurring. Investment pool Should possess an understanding of the nature of the relationship with the investment pool stakeholders (operator, oversight committee and any others) and of the extent of influence over the investment pool, the terms for terminating a pooling agreement, and guidance on the requirement to pool investments. Should be able to identify, understand and effectively manage potential conflicts of interest between the administering authority pension committee, officers, oversight committee, other pool working groups and the investment pool operator and its staff and suppliers or advisors.
Investment performance and risk management
Total fund Understanding of the importance of monitoring asset returns relative to the liabilities. Understanding of the ways of assessing long-term risks (eg asset liability modelling). Performance of the investment pool Understanding of the Investment Regulations and the requirements for monitoring investments. Understanding of the administering authority and pension committee investment strategy requirements of the investment pool and how to effectively monitor the delivery of the investment strategy. Understanding of the non-financial risks within the operation and relationship with the investment pool (operator, oversight committee and other parties) and how these can be mitigated or best managed. Page 39
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Financial markets and products knowledge
Governance An awareness of the Local Government Pension Scheme (Management and Investment of Funds) Regulations 2009 and their application to the newer types of investment instrument. Knowledge of the Myners principles and associated CIPFA guidance. Knowledge of the regulatory requirements under the FSA for investment managers and investment pools. Knowledge of the regulations, best practice and guidance with regard to the investment activities of local government pension funds and investment pooling. Investment strategy Detailed understanding of long-term risk and return parameters of equity, bond and property markets, and issues arising from short-term volatility. Understanding of the effects on overall risk and return of combining these asset classes in the pension fund strategy. Understanding of the relationship between the investment and funding strategies and the liabilities of the fund. A working knowledge of ‘alternative’ asset classes available for pension fund investment (private equity, infrastructure, absolute return mandates etc), including the practicalities of investing, prospective risks and returns and correlation with other asset classes. Understanding of the costs and benefits of active and passive currency hedging strategies, including implementation issues. Investment manager structures Understanding of the relative attractions of active and passive management across different asset classes. Understanding of the role of active manager risk within the investment arrangements. Understanding of the concepts of ‘risk budgeting’, sources of return (alpha and beta), and improving the ‘efficiency’ of the arrangements. Understanding of the practical implications of pooled and segregated mandates in terms of setting investment guidelines, effecting transactions and client reporting. Understanding of the implications of combining managers with different investment styles. Other issues Understanding of the responsibilities of the custodian and procedures for reconciling information with investment providers. Understanding of the costs and benefits of stock lending and commission recapture programmes. Investment pool Understanding of the investment pool operator’s and oversight committee’s approach to pooling and delivering access to the different asset classes and/or investment funds. Understanding of which assets and investments may sit outside of the investment pool, and their nature and characteristics.
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Actuarial methods, standards and practices
Governance A detailed knowledge of the duties and responsibilities of committee members. A reasonable awareness of the Local Government Pension Scheme (Benefits, Membership and Contributions) Regulations 2007 and the Local Government Pension Scheme (Administration) Regulations 2008 and their main features. Knowledge of the Local Government Pension Scheme Regulations 2013. An appreciation of LGPS discretions and how the formulation of the discretionary policies impact on the pension fund, employers and local taxpayers. An appreciation of the latest changes to the scheme rules. Valuations A detailed knowledge of the valuation process, including: the actual valuation processes agreeing the financial and demographic assumptions developing and publishing the funding strategy statement in conjunction with the fund actuary signing off the rates and adjustment certificate inter-valuation monitoring monitoring of early and ill health retirement strain costs the inclusion of new employers into the fund and the implications of cessation with existing employers. Understanding of the difference between the funding valuation exercise and FRS 17. Outsourcing A general awareness of the requirements of the Treasury’s ‘Fair Deal’ guidance and related guidance in relation to outsourcing and bulk transfers.
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Chief investment officer/investment director/pensions director/head of pensions Pensions legislative General pensions framework and governance A detailed understanding of the general pensions legislative framework in the UK, context particularly: Pensions Act 1995 Pensions Act 2004 Occupational and Personal Pension Schemes (Disclosure of Information) Regulations 2013. Scheme-specific legislation Should possess a detailed understanding of the legislation specific to the scheme: Local Government Pension Scheme (Benefits, Membership and Contributions) Regulations 2007 Local Government Pension Scheme (Administration) Regulations 2008 Local Government Pension Scheme (Management and Investment of Funds) Regulations 2009 Local Government Pension Scheme Regulations 2013. Understanding of how the scheme interfaces with other private and state pension provision. Tax legislation A detailed understanding of pension scheme tax legislation and the UK pension scheme reporting framework, in particular: Finance Act 2004, as amended related statutory instruments Pensions regulators and advisors Understanding of how the roles and powers of the Pensions Regulator, the Pensions Advisory Service and the Pensions Ombudsman relate to the workings of the scheme. Investment pool Should possess a detailed understanding of the structure, operation and purpose of the investment pool operator, oversight committee and other organisations which are part of the investment pool arrangements, including the structure of the relationship with the other participants within the pool. Should possess a detailed understanding of the regulation, best practice and guidance related to investment pooling and the delivery of the investment objectives of the administering authority and pension committee by the chosen investment pool. Should possess a detailed understanding of the interaction between the administering authority, the pension committee, the investment pool operator and investment pool oversight committee; in particular reporting requirements, influence and accountability. Should possess a detailed understanding of the statement of investment principles or investment strategy statement and the investment pool operator’s interpretation and expected delivery of those investment objectives.
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Pensions accounting and auditing standards
Detailed knowledge of relevant pensions accounting standards as they apply to the scheme and to the employer: Pensions SORP FRS 17 (IAS 19) iFReM. Understanding of the approach to pensions external audit as set down in APB Practice Note 15. Understanding of the role of internal audit in the governance and assurance process. Awareness of and compliance with the CIPFA statement of expertise as it applies to: leadership and strategic management governance, ethics and values financial and performance reporting audit and accountability strategic and operational financial management partnerships and stakeholder relations change, risk and project management.
Financial services procurement and relationship management
Managing procurement Should set down the terms of engagement for working with the procurement function. Able to resolve difficulties and challenges that arise within the supply chain and that threaten key relationships. Able to create and maintain a culture that encourages and recognises creativity and innovation. Able to investigate relationships with key and critical stakeholders relevant to public procurement. Able to develop and communicate conflict management strategies to resolve differences with stakeholders. Able to critically evaluate the significance of changing social and political agendas for public procurement, and assess the impact on the organisation’s procurement policy. Able to analyse the effectiveness of governance and oversight arrangements for procurement.
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Able to critically evaluate methods and processes of performance evaluation of procurement and relationship management. Supplier risk management Awareness of the nature and scope of risks for the organisation. Able to assess the sources of supplier risk and the likely impact of those risks upon the organisation. Able to plan and implement an appropriate risk management process in order to protect the organisation’s interests. Understanding of how supplier appraisals, pre-qualification of suppliers and contract monitoring can help to mitigate risks. Able to develop systems for testing risks and monitoring them accordingly. Understanding of how to apply risk management principles to various procurement and supply management scenarios. Able to apply a range of techniques to mitigate risk proactively and to reduce the consequential losses in the instance of a risk event occurring. Investment pool Should possess a detailed understanding of the nature of the relationship with the investment pool stakeholders (operator, oversight committee and any others) and of the extent of influence over the investment pool, the terms for terminating a pooling agreement, and guidance on the requirement to pool investments. Should be able to identify, understand and effectively manage potential conflicts of interest between the administering authority pension committee, officers, oversight committee, other pool working groups and the investment pool operator. Investment performance and risk management
Total fund Understanding of the importance of monitoring asset returns relative to the liabilities. Knowledge of ways of assessing long-term risks eg asset liability modelling. Understanding of the merits of manager diversification. Investment management Close knowledge of prevailing market conditions within UK and overseas equity markets and UK bond and property markets. Understanding of the principles of portfolio construction within both bond and equity mandates. Understanding of portfolio risk monitoring techniques. Knowledge of trading systems and practices within bond and equity markets. Understanding of the importance of setting appropriate benchmark indices. Performance of the investment pool Detailed understanding of the Investment Regulations and the requirements for monitoring investments. Detailed understanding of the administering authority and pension committee investment strategy requirements of the investment pool and how to effectively monitor the delivery of the investment strategy. Detailed understanding of the non-financial risks within the operation and relationship with the investment pool (operator, oversight committee and other parties) and how these can be mitigated or best managed.
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Financial markets and products knowledge
Governance A detailed knowledge of the Local Government Pension Scheme (Management and Investment of Funds) Regulations 2009 and their application to the newer types of investment instrument. Knowledge of the Myners principles and associated CIPFA guidance. Thorough knowledge of the regulatory requirements for investment managers and investment pools. Thorough knowledge of the regulations, best practice and guidance with regard to the investment activities of local government pension funds and investment pooling. Investment strategy Detailed understanding of long-term risk and return parameters of equity, bond and property markets, and issues arising from short-term volatility. Understanding of the effects on overall risk and return of combining these asset classes in the pension fund strategy. Understanding of the relationship between the investment and funding strategies and the liabilities of the fund. A working knowledge of ‘alternative’ asset classes available for pension fund investment (private equity, infrastructure, absolute return mandates etc), including the practicalities of investing, prospective risks and returns and correlation with other asset classes. Understanding of the costs and benefits of active and passive currency hedging strategies, including implementation issues. Investment manager structures Understanding of the relative attractions of active and passive management across different asset classes. Understanding of the role of active manager risk within the investment arrangements. Understanding of the concepts of ‘risk budgeting’, sources of return (alpha and beta), and improving the ‘efficiency’ of the arrangements. Understanding of the practical implications of pooled and segregated mandates in terms of setting investment guidelines, effecting transactions and client reporting. Understanding of the implications of combining managers with different investment styles. Other issues Understanding of the responsibilities of the custodian and procedures for reconciling information with investment providers. Understanding of the costs and benefits of stock lending and commission recapture programmes. Investment pool Detailed understanding of the investment pool operator’s and oversight committee’s approach to pooling and delivering access to the different asset classes and/or investment funds. Detailed understanding of which assets and investments may sit outside of the investment pool, and their nature and characteristics.
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Actuarial methods, standards and practices
Governance A detailed knowledge of the Local Government Pension Scheme (Benefits, Membership and Contributions) Regulations 2007, the Local Government Pension Scheme (Administration) Regulations 2008 and the Local Government Pension Scheme Regulations 2013. A detailed knowledge of LGPS discretions and how the formulation of the discretionary policies impact on the pension fund, employers and local taxpayers. Thorough knowledge of overriding legislation that impacts upon administration and decision making eg HMRC taxation, TUPE and age discrimination. Administration Able to maintain clear lines of communication with fund actuary for efficient production of valuation reports, FRS 17 reports and other ad hoc enquiries. System manager or main contact for pensions administration software providers and production of necessary reports and extracts. Ensures good communication exchange with fund employers on all aspects of the LGPS. Ensures good communication exchange with scheme members. Maintains a ‘team knowledge’ of aspects relating to LGPS and associated issues with pension team. Ensures the correct and timely receipt and accounting of payments due to the pension fund, eg employer contributions and strain costs. Knowledge of organisation’s corporate objectives and how these fit into decision making processes relating to the LGPS. Valuation A detailed knowledge of the valuation process, including: the actual valuation processes agreeing the financial and demographic assumptions the development and publication of the funding strategy statement signing off the rates and adjustment certificate inter-valuation monitoring. Monitoring of early and ill health retirement strain costs. The inclusion of new employers into the fund and the implications of cessation with existing employers. Understanding of the difference between the funding valuation exercise and FRS 17. Outsourcing A thorough knowledge of the requirements of the Treasury’s ‘Fair Deal’ guidance and related guidance in relation to outsourcing and bulk transfers. Other issues Awareness of other pension arrangements particularly with regard to staff transfers. Works closely with HR colleagues when determining discretionary policies that fit in with the corporate and workforce ethos.
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Treasury or investment manager/pension fund accountant Pensions legislative General pensions framework and governance A detailed understanding of the general pensions legislative framework in the UK, context particularly: Pensions Act 1995 Pensions Act 2004 Occupational and Personal Pension Schemes (Disclosure of Information) Regulations 2013. Scheme-specific legislation A detailed understanding of the legislation specific to the scheme: Local Government Pension Scheme (Benefits, Membership and Contributions) Regulations 2007 Local Government Pension Scheme (Administration) Regulations 2008 Local Government Pension Scheme (Management and Investment of Funds) Regulations 2009 Local Government Pension Scheme Regulations 2013. Understanding of how the scheme interfaces with other private and state pension provision. Tax legislation A detailed understanding of pension scheme tax legislation and the UK pension scheme reporting framework, in particular: Finance Act 2004, as amended related statutory instruments. Pensions regulators and advisors An understanding of how the roles and powers of the Pensions Regulator, the Pensions Advisory Service and the Pensions Ombudsman relate to the workings of the scheme. Pensions accounting and auditing standards
Detailed knowledge of relevant pensions accounting standards as they apply to the scheme and to the employer: Pensions SORP FRS 17 (IAS 19) iFReM. Detailed knowledge of the approach to pensions external audit as set down in APB Practice Note 15. Awareness of and compliance with the CIPFA statement of expertise as it applies to: governance, ethics and values financial and performance reporting audit and accountability strategic and operational financial management partnerships and stakeholder relations change risk and project management.
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Financial services procurement and relationship management
Financial evaluation of procurement Able to evaluate the appropriate cost and benefit models for a wide variety of scenarios. Able to evaluate and assess reports that have their origins in finance and accounting and relate them back to the procurement process. Able to compare the value and relevance of financial information in the context of the decision-making process for evaluation and selection of supplier and service providers. Able to propose financial management tools and techniques and able to apply these in relation to the total procurement and supply chain process. Effective negotiation Able to apply negotiation theories to achieve effective outcomes in the negotiation process. Able to set objectives for negotiations. Able to prepare and plan for effective negotiations. Able to take an active part in negotiation meetings. Able to use a range of effective and persuasive negotiation techniques. Able to recognise the different approaches required when negotiating with a range of different suppliers. Able to negotiate within the scope of organisations contract procedure rules and legal framework. Able to evaluate the effectiveness of negotiations and recommend future improvements. Developing contracts for supply Able to use contract specifications, performance measures and contract terms for the procurement of services. Awareness of the legal aspects of the procurement process and able to apply these to the formation of contracts. Understanding of the impact of express and implied contract terms. Able to recognise potential breaches of contract and able to draft appropriate remedies. Understanding of the legal and relationship issues arising from public sector procurement procedures, including e-tendering and the application of EU procurement directives, including the Public Contracts Regulations 2015. Understanding of the practices that can be adopted for contract award and review.
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Measuring supplier performance Understanding of how supplier performance measurement fits into the overall organisational management process. Able to understand and apply the various performance measures available to them. Able to explain the reasons for measuring suppliers’ performance. Able to appraise measures to improve supplier performance. Able to use a range of techniques to measure the impact of supplier performance on organisational efficiency. Able to interpret and apply statistical data to measure performance. Managing supplier relationships Able to review the effectiveness of existing relationships and identify areas for improvement. Able to evaluate the techniques used for supplier selection and make recommendations for improvement. Able to suggest procedures to support the effective outsourcing of services. Able to apply a range of interpersonal and communication techniques to maintain and develop effective relationships. Able to identify potential supplier problems and propose solutions. Able to explain how to monitor and review supplier relationships. Investment pool Should possess a detailed understanding of the nature of the relationship with the investment pool stakeholders (operator, oversight committee and any others) and of the extent of influence over the investment pool, the terms for terminating a pooling agreement, and guidance on the requirement to pool investments. Should be able to identify, understand and effectively manage potential conflicts of interest between the administering authority pension committee, officers, the oversight committee, other pool working groups and the investment pool operator. Investment performance and risk management
Investment management Close knowledge of prevailing market conditions within UK and overseas equity markets and UK bond and property markets. Understanding of the principles of portfolio construction within bond and/or equity mandates (depending on specialisation). Understanding of portfolio risk monitoring techniques. Knowledge of trading systems and practices within bond and/or equity markets. Understanding of the importance of setting appropriate benchmark indices. Performance of the investment pool Understanding of the Investment Regulations and the requirements for monitoring investments. Understanding of the administering authority and pension committee investment strategy requirements of the investment pool (operator, oversight committee and other parties) and how to effectively monitor the delivery of the investment strategy. Understanding of the non-financial risks within the operation and relationship with the investment pool and how these can be mitigated or best managed. Page 49
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Financial markets and products knowledge
Governance A detailed knowledge of the Local Government Pension Scheme (Management and Investment of Funds) Regulations 2009 and their application to the newer types of investment instrument. Knowledge of the Myners principles and associated CIPFA guidance. Thorough knowledge of the regulatory requirements for investment managers and investment pools. Thorough knowledge of the regulations, best practice and guidance with regard to the investment activities of local government pension funds and investment pooling. Investment strategy Detailed understanding of long-term risk and return parameters of equity, bond and property markets, and issues arising from shorter-term volatility. Understanding of the effect on overall risk and return of combining these asset classes in the pension fund strategy. A working knowledge of ‘alternative’ asset classes available for pension fund investment (private equity, infrastructure, absolute return mandates etc), including the practicalities of investing, prospective risks and returns and correlation with other asset classes. Costs and benefits of active and passive currency hedging strategies, including implementation issues. Investment manager structures Understanding of the relative attractions of active and passive management across different asset classes. Understanding of the role of active manager risk within the investment arrangements. Understanding of the concepts of ‘risk budgeting’, sources of return (alpha and beta), and improving the ‘efficiency’ of the arrangements. Understanding of the practical implications of pooled and segregated mandates in terms of setting investment guidelines, effecting transactions and client reporting. Understanding of the implications of combining managers with different investment styles. Other issues Knowledge of settlement procedures and interpretation of accounting information supplied by investment providers and custodian. Understanding of the practicalities of monitoring stock lending and commission recapture programmes. Investment pool Knowledge of the investment pool operator’s and oversight committee’s approach to pooling and delivering access to the different asset classes and/or investment funds. Knowledge of which assets and investments may sit outside of the investment pool, and their nature and characteristics.
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Actuarial methods, standards and practices
Governance A detailed knowledge of the duties and responsibilities of committee members. An awareness of the Local Government Pension Scheme (Benefits, Membership and Contributions) Regulations 2007, the Local Government Pension Scheme (Administration) Regulations 2008 and the Local Government Pension Scheme Regulations 2013 and their main features. A detailed understanding of the correct accounting of funded and unfunded payments into the fund from all scheme employers. An appreciation of the latest changes to the scheme rules. Valuations An understanding of the valuation process, including: the setting of financial and demographic assumptions the role of the funding strategy statement the rates and adjustment certificate inter-valuation monitoring. Understanding of the difference between the funding valuation exercise and FRS 17.
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Investment administrator/investment officer/assistant pension fund accountant Pensions legislative General pensions framework and governance A detailed understanding of the general pensions legislative framework in the UK, context particularly: the Pensions Act 1995 the Pensions Act 2004 the Occupational and Personal Pension Schemes (Disclosure of Information) Regulations 2013. Scheme-specific legislation A detailed understanding of the legislation specific to the scheme: Local Government Pension Scheme (Benefits, Membership and Contributions) Regulations 2007 Local Government Pension Scheme (Administration) Regulations 2008 Local Government Pension Scheme (Management and Investment of Funds) Regulations 2009 Local Government Pension Scheme Regulations 2013. Understanding of how the scheme interfaces with other private and state pension provision. Tax legislation Should possess a detailed understanding of pension scheme tax legislation and the UK pension scheme reporting framework, in particular: Finance Act 2004 as amended related statutory instruments. Pensions regulators and advisors An understanding of how the roles and powers of the Pensions Regulator, the Pensions Advisory Service and the Pensions Ombudsman relate to the workings of the scheme. Investment pool Should possess a detailed understanding of the structure, operation and purpose of the investment pool operator, oversight committee and other organisations which are part of the investment pool arrangements, including the structure of the relationship with the other participants within the pool. Should possess a detailed understanding of the regulation, best practice and guidance related to investment pooling and the delivery of the investment objectives of the administering authority/pension committee by the chosen investment pool. Should possess a detailed understanding of the interaction between the administering authority, the pension committee, the investment pool operator and investment pool oversight committee; in particular reporting requirements, influence and accountability. Should possess a detailed understanding of the statement of investment principles or investment strategy statement and the investment pool operator’s interpretation and expected delivery of those investment objectives.
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Pensions accounting and auditing standards
Detailed knowledge of relevant pensions accounting standards as they apply to the scheme and to the employer: Pensions SORP FRS 17 (IAS 19) iFReM. Awareness of the approach to pensions audit as set down in APB Practice Note 15. Awareness of the CIPFA statement of expertise as it applies to: leadership and strategic management governance, ethics and values financial and performance reporting audit and accountability strategic and operational financial management partnerships and stakeholder relations change risk and project management.
Financial services procurement and relationship management
Understanding public procurement Knowledge and understanding of the background to current public procurement policy and procedures. Understanding of the values and scope of public procurement and the roles of key decision makers and organisations. Able to understand and analyse the impact of procurement policy and government initiatives on procurement. Understanding of the significance of the financial accountability cycle for procurement policy and practice. Understanding the supplier environment Understanding of how different organisations and sectors interact in the business environment, both nationally and internationally. Understanding of the different types of market structures in which the organisation operates. Understanding of the importance of understanding and meeting stakeholder expectations in the purchasing environment. Understanding of how analysing the external environment can assist in making informed purchasing decisions. Able to demonstrate an understanding of the importance of analysing a range of financial and non-financial information relating to the external environment.
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Understanding the procurement process Able to identify the different types of operational objectives relevant to the procurement process in the public sector. Understanding of the importance of the best practice relating to setting objectives within procurement. Understanding of how to prepare supplier specifications. Understanding of the policy and information requirements of the organisation when preparing specifications. Understanding of the different stages of identifying and sourcing suppliers. Understanding of the different approaches for verifying supplier information. Understanding of the essential elements of a legally binding agreement. Supplier relationships Able to recognise the importance of maintaining effective commercial operational relationships within the supply chain. Able to distinguish between internal and external customers. Understanding of the need for effective and efficient procurement processes. Able to identify the information requirements of those involved in operational relationships. Understanding of how to improve operational supply relationships. Investment pool Should understand the nature of the relationship with the investment pool stakeholders (operator, oversight committee and any others) and of the extent of influence over the investment pool, the terms for terminating a pooling agreement, and guidance on the requirement to pool investments. Should be able to identify, understand and effectively manage potential conflicts of interest between the administering authority pension committee, officers, oversight committee, other pool working groups and the investment pool operator. Investment performance and risk management
Investment managers Able to interpret performance reporting from investment managers. Performance of the investment pool Understanding of the administering authority and pension committee investment strategy requirements of the investment pool and how to effectively monitor the delivery of the investment strategy. Able to interpret performance reporting from the investment pool.
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Financial markets and products knowledge
Governance An awareness of the Local Government Pension Scheme (Management and Investment of Funds) Regulations 2009 and their main features. Investment strategy Understanding of the risk and return characteristics of the main asset classes (equities, bonds, property). Investment manager structures Understanding of the difference between active and passive management. Understanding of the practical implications of pooled and segregated mandates in terms of setting investment guidelines, effecting transactions and client reporting. Other issues Knowledge of settlement procedures and interpretation of accounting information supplied by investment providers and custodian. Investment pool Appreciation of the investment pool operator’s and oversight committee’s approach to pooling and delivering access to the different asset classes and/or investment funds. Appreciation of which assets and investments may sit outside of the investment pool, and their nature and characteristics.
Actuarial methods, standards and practices
Governance An awareness of the Local Government Pension Scheme (Benefits, Membership and Contributions) Regulations 2007, Local Government Pension Scheme (Administration) Regulations 2008, Local Government Pension Scheme Regulations 2013 and their main features. Valuations A general understanding of the valuation process. Outsourcing A general awareness of the requirements of the Treasury’s ‘Fair Deal’ guidance and related guidance in relation to outsourcing and bulk transfers.
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Registered office: 77 Mansell Street, London E1 8AN T: +44 (0)20 7543 5600 F: +44 (0)20 7543 5700 www.cipfa.org CIPFA registered with the Charity Commissioners of England and Wales No 231060