11 April 2008
CIPFA's Pensions Panel is researching the knowledge, skills and competencies needed by all those involved in managing local government pension funds. Bob Summers outlines the panel's approach
We have much to be proud of in the financial management of the Local Government Pension Scheme. With £122bn under investment at March 2007, it is a significant enterprise.
Successful though it is, there is constant pressure to improve performance. Against this backdrop, the CIPFA Pensions Panel is undertaking research to define the knowledge, skills and competencies required in the management of LGPS investments. This will cover pension committee members, fund administrators and all those involved in the detailed daily oversight and placement of funds.
The CIPFA panel includes representatives from the Department for Communities and Local Government, the Audit Commission, the National Association of Pension Funds, the consultancies (through Hymans Robertson) and local authorities.
Its analysis will take into account the particular needs of the few large funds that manage investments in house. And, although most funds have external managers and investment advisers, this does not lessen the need for adequate knowledge and skills about how pension funds operate and the role of the experts. The 'customer' still needs to determine a funding strategy to achieve an investment return identified by asset liability studies.
Investment knowledge cannot be isolated from an understanding of the overall framework within which LGPS investments are made. This involves the regulatory position, membership, fund liabilities, cashflow, actuarial valuations, shareholder activism and many other wider issues. Another point is the extent to which general financial competencies, as demonstrated in, for example, the CIPFA financial management model, should be considered.
A few years ago, CIPFA's work on the new system of capital finance introduced by the Local Government Act 2003 led to the self-regulated Prudential Code. Another example of self-regulation is the Treasury Management Code. Whether the Pensions Panel's work leads to a similar code is an issue for the future. However, an approach that leads to wide acceptance of a code of practice on knowledge, skills and competencies is attractive.
Initially, however, the framework could be a guide similar to CIPFA's Audit Panel publication, The excellent internal auditor. Another possible approach is exemplified in the self-assessment framework for long-term responsible investment by pension schemes, which is drawn up by the CIPFA/Local Authority Pension Fund Forum/UK Social Investment Forum.
Self-assessment would allow funds to adapt best practice to local circumstances and would be flexible enough to place differing emphasis on parts of the framework. Delivery of the self-assessment would be a matter of local accountability. The requirement that funds publish annual reports could be an ideal way of providing assurances on compliance with a code.
Investment management and financial instruments are becoming increasingly complex and sophisticated. The industry and funds are continually considering how best to reconcile the risk/return equation with the dynamics of investing for longevity.
The sheer size of LGPS funds warrants serious consideration in itself. A typical county fund could have more than 50,000 members and assets exceeding £1bn. Although plenty of training is available, there is no framework within which training needs can be analysed and assessed.
Many funds undertake pension committee member training, and there are exemplars. However, there are substantial variations in the extent of training and there is no common assessment and definition of need.
Contrast this with the requirements on corporate trustees. They are subject to the Trustee Knowledge and Understanding Code of Practice, which was issued by the pensions regulator following the Pensions Act 2004. Within this, there is an obligation to act prudently. This should underpin all investment decisions and requires specific knowledge and skills. The need to act prudently and with reasonable care also figures in investment trade body the CFA Institute's Code of Conduct for Members of a Pension Scheme Governing Body.
The development of a knowledge and skills framework goes to the very heart of the Pensions Panel's role, which is 'to develop, promote and maintain best practice, standards and guidelines'.
A self-assessment framework can work only if it has the fullest endorsement and support. Much emphasis will be placed in the coming months on the need to talk to all our stakeholders, including the Audit Commission, the industry, our advisers and all our LGPS funds.
But if you have any particular views you would like us to consider, please contact the Pensions Panel through Nigel Keogh ([email protected]).
Bob Summers is chair of the CIPFA Pensions Panel
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