Agenda item

Report of the Director of Finance and Resources

The Interim Chief Internal Auditor explained that in 2013 the government had explored several options for improving the efficiency and sustainability of the LGPS and undertook extensive consultation on the potential to deliver savings through greater investment, management and collaboration.  The target date for implementation of 1 April 2018 had been achieved.

Four criteria were set by government: benefits of scale (at least £25bn in assets); strong governance and decisions making; reduced costs and excellent value for money and an improved capacity and capability to invest in infrastructure. 

On 23 March 2017 the County Council had approved the Council to enter into the Shareholders’ Agreement and the Inter-Authority Agreement to establish a joint asset pool (LGPS Central), and investment management company (LGPS Central Ltd) and Joint Committee.

Staffordshire had joined with Cheshire, Derbyshire, Leicestershire, Nottinghamshire, Shropshire, West Midlands and Worcestershire to form a partnership (or Joint Asset Pool) called LGPS Central and investment company (LGPS Central Ltd) and a Joint Committee. West Midlands Integrated Transport Authority (WMITA) are also a partner, but not a shareholder of the investment company.  The pensions pool had, when first established, a combined asset value of £35bn.  This value has slightly increased since this time. 

LGPS Central Ltd is an asset management company with an authorised contractual scheme.  Except for WMITA, all the local authorities are members of LGPS Central Ltd.  Four sub-funds had been established since April 2018 and other sub funds are to be launched after this date.  The benefits of LGPS Central Ltd are robust governance arrangements around the company and assurance by setting up an FCA regulated entity and retention of ownership/control and oversight of the company.  However, it was a costlier arrangement due to overheads and governance cost irrespective of the amounts invested.

The governance structure was described, specifically the separation of the shareholder/client and company/regulator functions and oversight arrangements.  Detail was given in page 21 of the report.

The responsibilities of the Pool are to monitor the company and this aspect is included in the assurance framework.  Staffordshire County Council’s Internal Audit Service have taken the lead on the development of a pensions pooling assurance framework although this exercise has involved all partner funds’ Internal Audit teams in getting to a draft document. 

In creating LGPS Central there had been a split in roles and responsibilities in terms of what the pension fund administrator retains and what went into the Pool.  LGPS Central being responsible for the structure and range of the funds offered, hiring and firing of the investment manager and the investment management company, LGPS Central Ltd, monitors the investment manager and their performance and ensured that the investment company satisfies all the regulatory requirements. 

The individual pension funds retained responsibility for the funding strategy, the investment strategy and all liabilities of the pension fund and the pool had responsibility for looking after the shareholder and investment areas and for pension fund performance monitoring.  Many of these areas are included within the assurance framework and will be audited as part of pension fund audit plan going forward, the results of which will be reported to the Committee in accordance with the internal audit charter and reporting protocol.

The Pool’s role as an investor is discharged through the Joint Committee.  The Joint Committee is governed by an Inter-Authority Agreement.  The Joint Committee being responsible for considering common investor issues, monitoring the delivery of the client service and performance of investments and ensuring the delivery of LGPS Central objectives.  The Committee has one elected member from each Partner Fund on the Joint Committee and meets twice yearly in June and December. The Chairman of the Pensions Committee of Staffordshire County Council sits on the Joint Committee.  Decision making responsibilities remained with individual Partner Funds. 

The Shareholders’ Forum is governed by the Shareholder’s Agreement.  The forum was responsible for providing control and influence over the company; oversight of the operation and performance of LGPS Central Ltd and represented the ownership rights and interests of the shareholding councils and decision making with regard to reserved matters (requiring 75%-100% approval) this included, for example, extending scope of LGPS Central Ltd.  Each fund has one representative who sat on the Shareholder Forum.

The difference between shareholder and Joint Committee functions were described.  Shareholder functions related to ownership of the Operator (i.e. LGPS Central Ltd) and are subject to company law, articles of the company and a shareholder agreement.  Investor functions related to the investment in the collective investment vehicles (e.g. authorised contractual scheme).  Representation was through the Joint Committee that operated under public law requirements.

The Practitioner Advisory Forum (PAF) supports both the Joint Committee and the Shareholders Forum by providing technical and advisory support.  They are made up of a working group of officers from each authority.  The role of the PAF is to ensure the objectives of the LGPS Central are being delivered; provided a central resource for advice, assistance, guidance and support for the Joint Committee, Shareholders’ Forum and for the Councils as a collective group of investors in the Pool; provided technical support during Shareholders’ Forum and Joint Committee and managed conflicting demands and interests and spoke with “one voice”.

Regarding the governance structure of LGPS Central Ltd. The governance framework ensures strict adherence to both the FCA (Financial Conduct Authority) regulatory obligations and with regard the Companies’ Act.  The Company Board was supported by five Committees.  The main sub-committee was the Audit, Risk and Compliance Committee whose role it was to ensure the integrity of financial statements and the financial reporting process; oversight of compliance with legal and regulatory requirements, as well as performance of the internal audit function and checking the effectiveness of the Company’s systems of internal controls and policies and procedures for risk assessment and risk management.

Staffordshire County Council were co-ordinating a collaborative internal audit response and put their name forward to act as the lead to develop an assurance framework involving internal audit functions from all LGPS Partner Funds; external audit; PAF Officers; LGPS Central Ltd and representatives from other authorities involved in different pooling models via the Midlands County Council Internal Auditors Group and the Local Authority Chief Auditors Network. The draft assurance framework had been completed in October 2018 but will continue to be a live document which is updated to take account of new risks.  Whilst LGPS Central Ltd, as a new company, is not required to have an annual assurance framework (AAF) 01/06 review in year 1, it has been agreed that they will undertake their own internal review against the control objectives contained in the AAF 01/06. The results of this work will feed into our assurance for 2018/19.

The interim Chief Internal Auditor explained the stages carried out in developing the pensions pooling assurance framework.  In 2017-18 background research was undertaken. In July 2018 a meeting took place with LGPS Central Ltd to firm up the assurance framework and to discuss what they could provide.  In August 2018 the Company agreed to make available their various policies and procedures and contract compliance monitoring plans; their annual report; their internal control review setting out the results of their review against the AAF 01/06 control objectives. It has been agreed that the internal control review work would also be reviewed by their own independent internal audit team to give independent assurance to this exercise.

The Assurance Framework is based on the three lines of defence model. The first line of defence being the management controls and internal control measures. The second line of defence was management oversight, questioning who had provided oversight, how frequently and what evidence was required. The third line of defence is internal audit who looked back over the first and second line of defence and feedback their results to the Audit and Standards Committee.

The Assurance Framework structure is based on the LGPS Central Pool’s Risk Register.    Key risks identified were governance, company/financial and operational matters, wider pooling and investment.  Bigger risks were identified on the investment and governance side.  There were fewer risks on the company/financial and operational side as these risks will be largely covered by the AAF 01/06 external review report. 

The LGPS Framework was described in detail on page 32 of the report.  The current position was that discussions were taking place with the eight partners with regard and who was going to do what; who was going to what collectively and who was going doing work individually, and how this information would be shared.  Discussions were taking place with LGPS Central Ltd and the Pool regarding setting up a Sharepoint facility where all this information could be collated and shared with partner funds’ internal audit functions e.g. with the Audit and Standards Committee.  A meeting would be taking place in the next couple of weeks to decide to who does what and this can then be taken forward. The Internal Audit Team would be interested in taking forward communication between LGPS Central, LGPS Central Ltd and Partner Fund Authorities and our own financial cost models and assumptions and how this operates, as well as assurance around the transitions process.  In terms of what work there was to be taken forward as a collective, the interim Chief Internal Auditor described the LGPS Central governance arrangements, information from the outcomes of the AAF report and monitoring of any exceptions.  External Audit may be interested in the governance arrangements, delivery of the investment strategy, performance of investments, the transitions and the strategic allocations. 

In terms of next steps, decisions will be taken about who does what individually and collectively; the format and frequency of assurance documents; how information is shared and the mechanism for keeping the assurance framework up-to-date.  The County Council’s Internal Audit Team will offer to keep the master document up-to-date.  Finally, within each area of risk it was envisaged that standardised control matrices, terms of reference and test plans are developed to ensure consistency across all local authorities when auditing the pooled arrangements. 

The interim Chief Internal Auditor explained to the Audit and Standards Committee what information is received in relation to the Pension Fund audit work.  The Committee receives the pension fund audit plan as an appendix to the main County Council Plan.  Going forward the Committee is likely to receive reports of internal audit work carried out on the Pool’s governance arrangements, work in relation to transitions along with some assurance regarding the Company’s system of control, in accordance with the pension fund audit plan.

Members asked how the Committee’s work fitted in with the work of the Pensions Panel.  The Chairman explained that the role of the Audit and Standards Committee was to ensure that systems and processes were in place. The role of the Pensions Panel was to performance manage the pension funds.  The Chairman paid tribute to the Internal Audit Team who had developed the Assurance Framework.

Members asked if the Council received remuneration from other authorities in the Pool for the work that had been undertaken on their behalf.  The interim Chief Internal Auditor responded that this work was about the Council getting their own independent assurance.  The company would get their own assurance through the AAF 01/06 review.  The interim Head of Treasury and Pensions stated that she had worked with the Pool setting up the company and in October 2017 when the Pool was set up for the Council she had taken a step back and monitored the performance of the Pool.  The interim Head of Treasury and Pensions is Staffordshire’s representative on the Practitioners’ Advisory Forum and this on-going assurance was paramount and welcomed.

Members asked if any problems with the other partners were envisaged. From an audit point of view the eight internal audit teams had worked well together.  From a technical point of view the partner funds had signed up to the inter- authority agreement and there were procedures if a partner wished to leave the Pool.  Key to the successful operation of the pool was the way in which partners had worked openly and transparently.

Members asked how an authority bid into the Pool for a level of investment they wished to make in their own area.  The interim Head of Treasury and Pensions explained that Staffordshire had an investment strategy.  She drew an analogy with “a sweet shop” explaining that individual authorities decided what they wanted to buy from “the shop” e.g. equities, bonds, properties, alternative assets.  The LGPS had undertaken a survey of all their partner funds and had decided what they might like to sell to authorities.  The individual authorities then go to the “sweet shop” and decide what they wanted to purchase.  There was some form of collaboration and co-operation regarding what is purchased.  The Pool undertook the bidding and would only sell what authorities wanted to buy.

RESOLVED: That the report be received.