Proposed legislation would give the Treasury new powers over the governance and valuation of local government pension funds. This raises a number of concerns over democratic accountability
When it comes to pensions, clichéd as it may be, the devil is truly in the detail. With the publication of the draft Public Service Pensions Bill last week, we now have more detail behind the thinking of the future shape of public sector pensions: the benefits they will deliver; how costs will be managed; and the way in which they will be governed.
With regards to the benefits, we have confirmation of the government’s previously-expressed preferred structural principles:
- All future defined benefit schemes must conform to a career average structure, unless the Treasury approves otherwise (but this would not extend to allowing the creation of new final salary pension schemes)
- The pension age will be linked to state pensions age, subject to a minimum of 65 years of age (except for army, police and fire pensions, where the pension age is set at 60)
For those who have been following developments in recent years, none of this comes as any great surprise.
However, it is in the areas of cost control and governance where elements of the draft bill raise some interesting questions.
The draft bill sets out new powers for the Treasury to specify ‘the data, methodology and assumptions’ to be used when undertaking valuations for public sector pension schemes. This is a move that, as local authority trade unions have already pointed out, has implications for the way in which the Local Government Pension Scheme is managed.
The proposed regulations also allow for the Treasury to determine the point at which any revised employer contribution rates are to be applied from.
At present the assumptions used in the valuation of LGPS funds and the phasing in of any changes to employer contribution rates are determined locally by each LGPS administering authority, acting on the advice of their actuary. Fund administrators are therefore able to select assumptions that provide the best match with a fund’s local circumstances and particular investment strategy.
Many LGPS funds also use tailor-made demographic assumptions that are particular to that funds individual experience of longevity or membership behaviour, which can vary significantly from fund to fund. Any subsequent changes in employer pension contributions that may arise from a fund valuation can be phased in to coincide with the provisions made in their medium-term financial planning.
The choice of assumptions, particularly financial assumptions (such as the discount rate, inflation, pay growth and pension increases) has a direct bearing on the valuation of liabilities and consequently on the level of employer pension contributions necessary to meet those liabilities.
This establishes a clear chain of accountability between the administering authority and the elected members that make up those charged with the governance of the LGPS fund on the one hand, and the local electorate (from whence the majority of LGPS participating employers draw their funding) on the other.
The provisions of the draft bill, if applied (the Treasury powers in this area are permissive, not mandatory), would essentially move responsibility for setting employer contribution rates and the timing of their application (and with it the accountability for the impact of those costs on local employers) away from LGPS fund managers, and into the hands of the Treasury.
This represents a major shift in the governance of local authority pensions and raises questions about future local democratic accountability for those pension funds.
Nigel Keogh is CIPFA’s technical manager for pensions