LASAAC CONSULTATION ON POTENTIAL
REQUIREMENTS FOR SEPARATE LGPS
PENSION FUND REPORTS – GMB
GMB represents more than 40,000 workers covered by the LGPS (Scotland).
We have been involved extensively in the negotiations with SPPA and other
stakeholders on the introduction of the new scheme and welcome the
opportunity to discuss other issues relating to the governance of the scheme.
As scheme members and taxpayers, GMB has a key interest in the transparent
and efficient management of the scheme.
GMB sees the central issue of this consultation namely separate LGPS fund
reports in the wider context of clear and robust scheme governance and the two
features: fund reports and fund structure as impossible to dissever. To
compound this view, the questions raised in the consultation paper must be
seen against the background of European law relating to the administration of
The Directive on the Activities and Supervision of Institutions for Occupational
Requirement Provision (“the IORP Directive”) was made on 3 June 2003 and
should have been implemented by member states by 23 September 2005. The
Directive applies in part to the LGPS (Scotland) however, there significant
grounds for arguing that it has not been implemented.
The relevant part of Article 2 says:
1 This Directive shall apply to institutions for occupational retirement
provision [i.e. in the UK context, occupational pension scheme]. Where, in
accordance with national law, institutions for occupational retirement
provision do not have legal personality, Member States shall apply this
Directive either to those institutions or, subject to paragraph 2, to those
authorised entities responsible for managing them and acting on their
2 This Directive shall not apply to:
(c) Institutions which operate on a pay-as-you-go basis…
The relevant part of Article 5 of the Directive says:
…Member States may choose not to apply Articles 9 to 17 to institutions
where occupational retirement provision is made under statute, pursuant
to legislation, and is guaranteed by a public authority.
Article 8 says:
Each Member State shall ensure that there is a legal separation between a
sponsoring undertaking and an institution for occupational retirement
provision in order that the assets of the institution are safeguarded in the
interests of members and beneficiaries in the event of bankruptcy of the
The relevant part of Article 18 says:
1 Member States shall require institutions located in their territories to
invest in accordance with the "prudent person" rule and in particular in
accordance with the following rules:
(a) the assets shall be invested in the best interests of members and
beneficiaries. In the case of a potential conflict of interest, the
institution, or the entity which manages its portfolio, shall ensure that
the investment is made in the sole interest of members and
(b) the assets shall be invested in such a manner as to ensure the
security, quality, liquidity and profitability of the portfolio as a whole.
Article 2 makes it plain that the Directive must be implemented even where the
fund does not have a formal separate legal personality. Article 2(2) exempts
the unfunded public sector schemes, specifically not all public sector schemes
meaning that as a funded scheme, the LGPS (Scotland) is covered by the
Article 5 makes it plain that Articles 8 and 18 apply to schemes, like the LGPS
(Scotland), notwithstanding the fact that there is a Crown guarantee.
Article 8 makes it plain that there must be a proper legal separation between
the institution and the employer(s). Where the institution does not have a
separate legal personality (see Article 2 above) the separation required applies
to the entity that manages the fund. If the case is made that there is no risk of
bankruptcy in the case of funds with a Crown guarantee, our response is that
Article 5 specifically applies Article 8 even where that is so. The purpose of
Article 8 is to ensure that the financial performance of the institution is
independent of the financial performance of the employer(s), and to enable
Article 18 to be effective.
That is because Article 18 requires the funds of the institution to be invested in
the best interests of members. If the funds of the institution are not legally
separated from the funds of the employer(s) it is impossible to tell if the
institution’s investments are being made in the best interests of members.
GMB concludes that Articles 8 and 18 apply to the LGPS (Scotland). The LGPS
funds must be properly legally separated from the employer(s). If, under
domestic law, there is no proper separation then the domestic legislation is
SPECIFIC QUESTIONS RAISED IN THE CONSULTATION
Question 1: Do you agree that LGPS funds are not separate legal
entities in their own right?
As a matter of domestic law, yes we agree. The effect of section 93 of the Local
Government (Scotland) Act 1973 is that all funds of a local authority form part
of the general fund of the authority unless (i) they are required to be held under
a separately constituted trust, (ii) they are required to be held in a common
good fund, or (iii) the Act or other legislation requires the funds to be paid into
a separate fund.
There is nothing in the LGPS legislation that requires pension scheme assets to
be held separately. To the contrary, Regulation 72 of the LGPS (Scotland)
Regulations 1998 requires the administering authorities to hold the fund assets.
The assets are under the supervision and control of the administering authority
as a whole. Pension committees, where established, are sub-committees of the
authority and not separate entities.
Regulation 12 of the LGPS (Management and Investment of Funds) (Scotland)
Regulations 1998 permits administering authorities to borrow LGPS money (with
interest) but that does not imply legal separation. To the contrary, there is
nothing to say that the decision to lend must be made independently by
separate managers of the LGPS fund. That is because the manager is a sub-
committee of the administering authority and has no distinct legal personality.
For the reasons set out in the introduction, the domestic legislation is defective.
LGPS funds must be legally separated, and managed by a body that is
independent of the employer(s).
Question 2: Do you agree with the statement that there is no current
legal requirement for the production of (a) an LGPS annual report (b) a
separate audit certificate for LGPS funds (c) a separate audit report for
GMB agrees in part.
There is no regulation equivalent to Regulation 34 of the LGPS (Administration)
Regulations 2008 applicable in England and Wales. However:
(a) Administering authorities are required to follow proper accounting
practices by section 12 of the Local Government in Scotland Act 1973,
and are required to follow guidance issued by Scottish ministers. That
guidance is contained in the Code of Practice on Local Authority
Accounting in the United Kingdom produced by CIPFA and LASAAC.
Paragraph 5.4 requires the core financial statements to show the pension
fund accounts separately and 5.42 to 5.48 detail how that is to be done.
(b) Regulation 30 of the LGPS (Administration) (Scotland) Regulations
2008 require administering authorities to provide a summary of the
accounts and the audit report regarding the fund “after any of its pension
funds has been audited”. That does not require a separate audit but
implies that one should be undertaken.
FRS 17 and IAS 26 require separate audit, and the Code of Practice is intended
to apply FRS 17 to local authority funds. If the Code of Practice, taking effect
as statutory guidance, does not require separate audit then that intention is not
Question 3: Do you agree that the arguments presented in paragraphs
3.2 to 3.7 suggest that changes to the current Scottish LGPS financial
reporting and auditing arrangements should be considered?
Yes, although we would add:
(a) Contributing members also provide the LGPS with funds (paragraph
3.2). They have as much interest in proper governance arrangements as
(b) Financial performance and stability are a key concern to
contributing members as well (paragraph 3.3). The consultation paper
says that the costs of the fund are recovered through increases in
employers’ contributions. The recent revisions are more than ample proof
that increased costs are also met by increasing member contributions and
Members have a right to comment on investment performance,
administrative efficiency and actuarial assumptions. They directly
impinge on their own contributions and benefits.
(c) An annual report will increase transparency (paragraph 3.4).
Accountability requires representation on the pensions committee.
(d) As mentioned above, if an audit report is prepared, it must be
presented to the participating employers (paragraph 3.5). The current
position is muddled however and a specific requirement for separate audit
(e) The assessment of risk areas and the audit plan fall on the
administering authority as a whole because there is no proper legal
separation (paragraph 3.6). Such separation is required by the IORP
Directive in any event.
Question 4: Are there any other reasons supporting consideration of
change to the current financial reporting and auditing arrangements?
GMB does not believe this question is phrased strongly enough. Changes are
required – it is not merely a question of further consideration.
Question 5: Costs
Proper transparency and accountability, following on from proper separation
may increase administration costs but before that is taken into consideration a
proper analysis of the administration costs of the funds needs to be made. It is
also possible that transparency will bring improved efficiencies that could reduce
We do not accept that any additional cost is a scheme expense. In many
schemes the cost is paid directly by the employer. If a separate charge is to be
made and paid by the LGPS fund then it must be the case that the managers of
the fund and not the administering authority selects the auditor on the basis of
proper open tender.
Question 6: Legal Entity
Recognition of the fund as a separate legal entity will make the presentation of
the employers’ accounts more straightforward. The employers’ pension charge
can follow FRS 17 requirements; the funds’ accounts can follow accepted
auditing practice for the preparation and presentation of the accounts of any
other occupational pension scheme.
Question 7: Voluntary Arrangements
Compliance with the IORP Directive requires the introduction of laws,
regulations or administrative arrangements (Article 22). A voluntary code does
not amount to an “administrative arrangement” under European case-law.
Neither does a statutory code which is promulgated on a “comply or explain”
Question 8: Governance
It follows from our analysis of the requirements of the IORP Directive that the
LGPS funds must be legally separated, the separation must be transparent and
the management of the funds must be separated from all of the employers.
The composition of pension committees is beyond the scope of the present
consultation. Clear financial and auditing arrangements are a necessary
incident of proper separation but not the end of the legal requirements of the
We would strongly encourage separate reporting and audit as a first step but
that must be approached in the knowledge that the current arrangements for
governance do not comply with the Directive and are unlawful.
Question 9: Stakeholder Engagement
As stated above, a separate annual report and accounts would be welcomed but
are not sufficient.
Question 10: Content of the Fund Annual Report
We believe that the practice applicable in the private sector should be followed.
In addition to the matters listed in paragraph 1.4 there should be an explicit
statement of the steps being taken to address any deficit in the fund, modelled
on the recovery plans required under the Pensions Act 2004 (but without
requirement for approval by the Pensions Regulator).
Question 11: Audit Arrangements
It follows from what we have said above that the auditor should be appointed
by an independent pensions committee, on terms determined by the committee.
There should be a separate audit report and certificate. We note, in passing,
that the consultation paper refers to LGPS trustees when there are no such
things. We believe that the term is apposite however: the members of the
pensions committee should have the same role and function as trustees of a
private sector scheme, owing fiduciary duties only to members of the fund and
not the employer and taxpayer. That is not to say that their interests are not
relevant – but the duty owed to them is not fully fiduciary. Article 18(1)(a) of
the Directive makes that a legal impossibility: if there is a conflict of interest the
interests of members must prevail.
Question 12: Timing
The directive should have been implemented by 23 September 2005. Further
delay risks the intervention of the European Commission and the
commencement of infringement proceedings.