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It mostly covers my work as UNISON Scotland's Head of Policy and Public Affairs although views are my own. For full coverage of UNISON Scotland's policy and campaigns please visit our web site. You can also follow me on Twitter. I hope you find this blog interesting and I would welcome your comments.

Thursday, 19 April 2012

Pensions Governance

Several meetings this week have touched on governance of pension schemes and tomorrow UNISON Scotland is supporting the Just Banking conference in Edinburgh.



In our private or not for profit sector pension schemes governance is covered by the Pension Act and the subsequent codes of practice that require, among other matters, that at least one-third of trustees are member nominated. That’s not to say that there are no problems. In the current pensions environment being a trustee can be challenging and a quick glance through the Pensions Regulator web site highlights how pension governance can go very wrong.



In the public sector many members are in pay-as-you-go schemes that don’t have funds and therefore governance is a matter of regulation. However, the biggest pension scheme in Scotland is the Local Government Pension Scheme (Scotland) (LGPS) with assets of nearly £20bn administered by 11 funds. While it is called the ‘local government’ scheme almost a third of members are employed by organisations outwith councils, including private, voluntary and other statutory bodies. These funds look and operate in a similar way to private sector schemes with contributions from employers and employees that are invested in order to meet scheme liabilities.



The big difference is the way the schemes are governed. The LGPS is probably the only funded scheme in the EU not to have effective and statutory member representation. In the main they are administered by a pensions committee made up almost exclusively of employer representatives i.e. councillors from the local authorities covered by the fund. The funds are also, in most cases, closely linked to the organisation of a lead council in a way that would not be acceptable in a private pension scheme.



There has been some progress in improving the governance of the LGPS in Scotland. In April 2011 guidance was issued to all funds that set out compliance standards against which funds are to measure their governance arrangements. This came out of the 2008 agreement on the new LGPS in Scotland. However, the latest progress report indicates that even the modest requirements of this guidance have not been fully implemented by every fund.



Most funds do now at least have consultative panels that include representatives of scheme members and in the best funds these operate well, engaging members and supporting them with training and access to papers. Most funds have also made a real effort to communicate with scheme members.



The slowest progress is over having representatives of scheme members as voting members of the fund decision making structures. This is recognised across Europe as essential for good governance and transparency and as I explained above is a statutory requirement in private sector schemes in the UK. Equally, there is no provision in the legislation that members serving on these committees have to make investment decisions in the best interests of beneficiaries or address potential conflict of interests with the councils that make up the fund. UNISON believes that the current arrangements sit outside the requirements of European law, particularly Directive 2003/41/EC, known as the IORP Directive.



It is sometimes argued that because LGPS members contributions and benefits are set by law they bear no risk from poor investment and governance decisions. This is no longer the case because the UK and Scottish Government has the power to change benefits and are more likely to do this if investment income falls. In addition since 2009 member contributions are subject to ‘cost sharing’ arrangements. In practice there are fewer protections for LGPS members than those in private sector schemes. As the recent pension disputes have shown, trade union strength is the only defence scheme members have against a rapacious government hell bent on undermining quality pension schemes.



Pension fund representation is not simply a moral issue. As David Pitt-Watson said in ‘The New Capitalists’ (2006) – “Pension plan flaws often occur because plan members tend to have little or no representation in the governance of funds. Worse, secrecy makes it difficult for citizen investors to monitor what is being done in their name”. I would argue that the economic power of the LGPS in Scotland is little understood or necessarily deployed in the interests of members or the wider community. Stronger pension governance could provide the basis for a more radical approach. The work done by trade unions in other countries shows us how a different approach can work.



If the banking crisis tells us anything it demonstrates that we need to take greater control and promote more transparency over the financial system. Our pension funds need to be a part of that liberation.         

3 comments:

  1. I agree we should be making much more of this resource. More investment in Scotland in particular.

    ReplyDelete
  2. I pay into the LGPS and I didn't realise we were not represented on the committees that make investment decisions. I thought the Maxwell case had changed all that?

    ReplyDelete
  3. This was a nice post and I think it is pretty easy to see from the other comments as well that this post is well written and useful. Keep up the good work.
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    ReplyDelete