By Nigel Keogh | 1 July 2012
Pension funds are in the risk business – but the local government scheme faces big changes and therefore fresh challenges. Help is at hand
Image | rigsbyphoto / shutterstock
Management of risk is a major responsibility for all those charged with the governance of a public body. For the administrators of the Local Government Pension Scheme, it is at the heart of what they do. But there are fresh challenges ahead, with wide-ranging changes to the scheme and a crucial valuation round in 2013/2014. To help authorities, CIPFA’s pensions panel is working on a comprehensive risk guide, to be published this year.
The basic principles of risk management in the context of governance are set out in CIPFA’s 2007 Delivering good governance in local government framework. This requires organisations to:
- be rigorous and transparent about how decisions are taken; listen to and act on constructive scrutiny results
- have good information, advice and support to ensure that services are provided effectively and are what the community wants and needs
- ensure an effective risk management system is in place
- use their legal powers to the full benefit of their citizens and communities.
Risk is central to the LGPS. Pension funds are themselves risk management tools, as they manage the possibility of future income being unable to meet future liabilities by creating a reserve.
So a good deal of an administering authority’s risk management efforts will be directed towards mitigating the threat of an overall reduction in the value of the fund, while seeking positive risk investment opportunities. However, the risk management role is far wider than this.
The CIPFA pensions panel will be looking in detail at the range of fund risks. These include employer risks, arising, for example, from the changing mix of employers; those leaving the fund; and the potential for a shortfall in contributions.
Liquidity and maturity risks are also being heightened by the changes to the LGPS, including an increased emphasis on outsourcing; transfers of responsibility between different public sector bodies; a possible increase in opt-outs; and public spending cuts.
All these will reduce the workforce, which will affect membership and contributions.
These changes can also affect resources and skills. Job cuts and pay freezes might make public sector employment less attractive, with knock-on effects on the availability of suitably skilled staff.
In addition, long-term risks – such as inflation, life expectancy, interest rate and wage and salary inflation – can affect future liabilities.
A significant element of LGPS risk is administrative. Local authorities are exposed to a wide range of dangers, such as maladministration claims and capacity risk. Examples include:
- reliance on IT systems to communicate with employers and members
- business continuity
- over-reliance on key officers
- failure to provide the service in accordance with equality principles
- failure to process pension payments on time or provide timely advice to employers, contributors and pensioners
- failure to collect and account for contributions from employers and employees on time
- failure to communicate or engage with stakeholders.
There are risks, too, of failing to comply fully with the huge number of regulations on occupational pensions, which take up thousands of pages.
Last, and certainly not least, is the ever-present possibility of reputational risk. Public sector pensions attract a great deal of external scrutiny and therefore the possibility of negative commentary on all aspects of their administration. This is particularly so for fund management and employer/taxpayer contribution levels.
On the positive side, there is also the opportunity to enhance reputations through demonstrable good practice.
The pensions panel will be producing guidance on all these issues. It is also holding a workshop at the CIPFA conference, looking at managing risk through the acquisition and retention of appropriate knowledge and skills.
Nigel Keogh is pensions technical manager at CIPFA. A pensions workshop is being held on July 4 at the CIPFA conference in Liverpool
