Is governance in the LGPS fully aligned with TPR’s viewpoint?

​Earlier this year Hymans Robertson was appointed by the Scheme Advisory Board (SAB) to facilitate a review of governance structures for the LGPS.  The major issues have been conflicts arising between the administering authority and the pension fund, often centred round the role of the 151 Officer legally responsible, and lack of clarity and accountability between different roles and stakeholders. It is quite clear from The Pension Regulator’s presentation at the PLSA conference last week that their understanding of accountability is different from the LGPS community.  TPR’s focus is on local pension boards (LPBs) – witness the fact that TKU requirements in the public sector code of practice (COP14) apply to board members but not the pension committee members who actually take decisions.  Given that LPBs have no executive powers and very limited sanctions, this cannot be right.  Either TPR in concentrating on LPBs has misunderstood how the LGPS works, or their focus is deliberate but misplaced.  Either way, it leads to two glaring loopholes in governance: LPB members are accountable for non-compliance despite having no powers and there are no training requirements for those committee members who do have the (delegated) powers. We welcome the Hymans’ Good Governance project.   In our view a good outcome will be to clarify the relationships between the various stakeholders managing the fund.  These are primarily the administering authorities, the 101 committees with delegated powers and pension boards whose role is to ‘assist’ the administering authorities.  However, equally important are the other stakeholders, the members whose pension money it is and the employers who bear the brunt of contribution changes. Hymans are looking at four models, of which we think three would be feasible.  We would like to see clarity of responsibilities and duties (and TPR’s COP14 fully aligned with whatever is ultimately decided) and processes for dealing with conflicts of interest.  Above all we would like to see effective remedies for poor performance, particularly as pooling and shared services are an increasingly common model.  In the private sector, one can always terminate contracts but that isn’t the case here.   Read more about Linchpin’s approach to advising on governance here.  

William Bourne participates in social housing and infrastructure plenary

On 14th May 2019, William participated in a plenary on 'This house believes the LGPS should be required to build social housing and infrastructure for the good of the nation' at the PLSA Local Authority Conference 2019 - De Vere Cotswold Water Park Hotel, Gloucestershire.​

Upcoming events

Please find below a list of events that William and Mukesh are attending or speaking at: 10 October 2019 - Investing with Impact Summit - etc. venues, St Paul's, London - William will be attending this summit organised by DG Publishing in conjunction with Pensions for Purpose.   

Exclude or be a responsible investor? You can't be both

Responsible investment – ie. nudging (or more) investee companies towards sustainable business models - is at the heart of modern institutional share-ownership.  It relies on being a shareholder in a business, which is why many investors in the LGPS and elsewhere state in their investment policies that they prefer to engage rather than to exclude.  Shareholders who care are more likely to persuade companies to alter their behaviour than those who don’t. In contrast, charities tend to exclude companies whose activities are opposed to their own objectives, and campaigners put pressure on other investors to exclude sectors such as tobacco, armaments and fossil fuels.  The argument is that if demand for a share is lower, the price will fall, making it more expensive for the company to raise money through bond and equity markets (and incidentally sending executive share options into negative value). At Linchpin we see some significant inconsistency here.  If you don’t own alcohol shares, for example, how can you influence them to behave better?  If you don’t own oil shares, why would they listen to your views about climate change?  Are companies such as Sports Direct going to listen to non-shareholders? Reality is of course not black and white.  There are some activities which are generally beyond accepted social acceptance and sometimes banned by international conventions (eg. some kinds of munition manufacture).  Exclusion is hardly controversial here: the question should be why a listing authority permitted the company to list. For charities with a specific focus, there may well be justifiable concerns that donors will be put off.   Could an anti-tobacco charity hold a tobacco company?  We would still argue it will have more influence from the inside but the reputational risk argument may understandably carry more weight with its trustees. At Linchpin we are firm believers in investing responsibly and we would challenge those who exclude simply because it’s easier.  The effect of exclusion on companies is often to push them towards becoming private again.  They may then be out of sight but their behaviour won’t have changed.  We think responsible investment, and here we mean engagement, is both more likely to effect change and add value.  Compared to exclusion, that is win-win for investors. Our message for investors would be to consider carefully the reasons for any exclusions.  Find out how Linchpin can help you here.​

Is your organisation really smart?

I attended an interesting breakfast seminar at the consultants, Redington, last week about minimising mistakes. The starting point was that ‘stupid people don’t learn from their mistakes; smart people do; really smart people learn from other people’s mistakes’.  Two speakers, from KKR and 24 Asset Management, gave a short description of what they had done to make sure their organisations fell into the last category before a more general discussion.  Some of it is fairly obvious, at least to those of us who have been around for 30+ years: it is largely cultural and has to be led from the top; owning up to mistakes should be encouraged, not penalised, so long as the knowledge gained is shared; senior people should go out of their way to give time to dissenting views and always speak last at meetings; diversity of decision-makers is good; careful analysis both beforehand and afterwards (was the decision a good one?) is helpful. However, it is much easier said than done, particularly for younger organisations and staff.  The hard question came from the audience: if a junior employee makes a mistake which costs the business money, but owns up to it and shares the lessons learned with their colleagues, what do you do with their bonus?  Reduce it on the basis they made a mistake?  Leave it alone, on the basis that they behaved well?  Or increase it as a signal to encourage colleagues to learn from the mistake. One shared conclusion was that the behemoths among us, whether civil service or investment bank, don’t usually fall into the very smart category.​

William Bourne and Mukesh Malhotra attend LAPF strategic investment forum

On 7th February 2019, William and Mukesh were table representatives during the roundtable discussion on  'Asset pooling - are local authority pension funds saving money?'​ at the  LAPF Strategic Investment Forum in London

Pooling guidance

MCHLG has issued an informal consultation around updated guidance on pooling for LGPS funds.  The previous guidance was issued in 2015, prior to the establishment of most of the eight pools, and much has since changed.  The consultation is also welcome, so long as MCHLG is willing to listen to what it hears. Four years on, the case for pooling is not proven, except in the important sense that it has led to significant fee reductions.  It could be argued that this would have happened anyway but there is no doubt that the imminent arrival of the pools concentrated asset managers’ minds.  Aside from this, in our view the main benefit, again not unimportant, has been the increase in resources which can be directed to areas such responsible investment and, through collaboration, infrastructure. On the negative side, there have been significant costs in the setting up of the pools, both in the higher staffing levels and the need for legal and other advice.  How long it takes to recoup this is almost impossible to estimate but it certainly should be measured in decades, not years.  It also puts the Funds which are large enough to achieve economies of scale already in a dilemma: can they agree to transferring assets to the pools while fulfilling their fiduciary duty? The guidance proposes that they should take into account the benefits to members across the pool and indeed the whole LGPS, but we find it difficult to reconcile that with 101 Committee members’ duty to their local members and employers.  In our view, if the pools are indeed beneficial in the long term, they need to demonstrate that.  101 Committees can then make their own decision (we are tempted to add in their own time) on the basis of whether it is good for their own members without invoking parties further afield.  That would be clearly consistent with their fiduciary duty. Read Linchpin’s full response to the consultation here.​

William Bourne participates in responsible investing roundtable at the 15th annual lgps governance conference

17th - 18th January 2019 - 15th Annual LGPS Governance Conference 'Clarity in Confusion' - Bristol - William is participating in a roundtable on responsible investing​