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ITEM PF14
PENSION
FUND COMMITTEE – 23 MAY 2003
INVESTMENT
– THE DUTIES AND RESPONSIBILITIES OF THE COMMITTEE
Report by
Head of Legal Services and Solicitor to the Council
Introduction
- Local Government
Pension Schemes are administered under the 1972 Superannuation Act 1972,
and subsequent regulations. Section 7 of the 1972 Act empowers the Secretary
of State to make regulations for the provision of pensions for people
employed in local government, and the Local Government Pension Scheme
Regulations 1995 and 1997 contain detailed provisions for the administration
of Pension Funds by "administering authorities". The Regulations impose
specific duties on administering authorities as to the investment of
the assets of the fund which is their responsibility, but in addition
to this, the general law relating to Trusts and Trustees will also apply,
subject to any contrary provision in the Regulations themselves.
- The Pensions Ombudsman
has specifically stated that the term "Trustee" is frequently used as
a matter of convenience for those with the responsibility for administering
the Scheme. Members of the Pension Fund Committee are not Trustees in
the traditional sense of the word because this is a statutory scheme
but nevertheless the term aptly describes the duties that apply to Council
Members in the administration of the Scheme. (Hadley v Orkney Islands
Council: Pensions Ombudsman determination)
The Superannuation
Regulations
- Regulation L5
of the 1995 Regulations (as amended) requires the administering authority
to invest fund monies which are "not for the time being required to
meet payments to be made out of the fund", and power is included to
"vary the manner in which any fund money is for the time being invested".
Apart from prescribing certain types of approved investments, Regulation
L5 contains the simple general requirements for authorities in discharging
their investment functions to have regard –
- to the need
for diversification of investment of fund money,
- to the suitability
of investments which they propose to make, and
- to proper advice,
obtained at reasonable intervals.
- Regulation L8
expressly authorises administering authorities to appoint investment
managers to manage and invest superannuation fund moneys on their behalf,
provided that the appointment satisfies various conditions. Requirements
are imposed for reviews of the appointment and investments made by the
investment manager, and specify matters to be taken into account when
determining the terms of appointment and conducting such reviews.
- Administering
Authorities are required to invest pension fund monies not for the time
being required for the payment of benefits. Limitations are imposed,
however, to restrict the proportion of the fund’s investments which
may be placed in any category. (Local Government Pension Scheme (Management
and Investment of Funds) Regulations 1998).
- The principal
regulations relating to eligibility membership contributions and benefits
and payments are specifically set out in the Local Government Pension
Scheme Regulations 1997.
- An Administering
Authority must also publish in any statement, the extent to which it
has complied with the Chartered Institute of Public Finance and Accountancy’s
Guidance "Pensions Panel: Principles for Investment Decision Making
in the Local Government Pension Scheme in the United Kingdom" and to
give reasons where it does not comply (Local Government Pensions Scheme
(Management and Investment of Funds) (Amendment) Regulations 2002).
The Pension Fund Committee has reviewed compliance with this guidance
and the extent of its compliance is contained in the Oxfordshire Pension
Fund Statement of Investment Principles.
CIPFA
Pensions Panel: Principles for Investment (CIPFA Issue No 5 April 2002)
- As stated above
this guidance has statutory basis and needs to be complied with unless
specific and justifiable reasons can be claimed. Principle 1 on "Effective
Decision Making" has specific relevance to the obligations of "Trustees"
of Pension Fund. It states as follows:
"decisions
should be taken only by persons or organisations with the skills, information
and resources necessary to take them effectively. When Trustees elect
to take investment decisions, they must have sufficient expertise and
appropriate training to be able to evaluate critically any advice they
take… Trustees should assess whether they have the right set of skills,
both individually and collectively, and the right structures and processes
to carry out their role effectively."
- Elected Members
have a fiduciary duty to the fund, scheme members and local council
taxpayers in relation to the Local Government Pension Scheme. They retain
overall responsibility for the management of the fund and its investment
strategy, and individual decisions about investments. In the discharge
of that responsibility there is the statutory obligation to obtain regular
professional advice at regular intervals
The general
law relating to investment by Trustees
- The duties of
Trustees generally are based on case law and statute. Much of the case
law over the years has been concerned with disputes in connection with
private and family trusts and wills, as well as charities and there
have been surprisingly few cases dealing with pension funds specifically.
Whilst amendments to the Superannuation
Regulations
have removed many of the former restrictions on how investment were
to be made, the general legal principles have remained largely unchanged
over the years. The Court of Appeal in Roberts v. Hopwood (1925) said:
"A
body charged with the administration for definite purposes of funds
contributed in whole or part by persons other than the members of the
body owes, in my view, a duty to those latter persons to conduct that
administration in a fairly business-like manner with reasonable care,
skill and caution, and with a due and alert regard to the interest of
those contributors who are not members of the body. Towards these latter
persons the body stands somewhat in the position of Trustees or managers
of the property of others."
Cowan
and others v. Scargill and others
- (1) In this
case the Court stated the law in clear and unambiguous terms on the
question of what (if any) non-financial considerations Trustees can
take into account in making investment decisions, and the general principles
laid down are applicable to the way in which an administering authority
invests local authority superannuation fund moneys. The case concerned
the investment policy of the Mineworker’s Pension Scheme, and was brought
by the five Trustees appointed by the National Union of Mineworkers.
Mr Scargill and his fellow Trustees from the N.U.M. refused to countenance
any investment abroad, whether in land or in industry, and any U.K.
investment in sources of energy which could compete with coal, particularly
the oil industry. Also, they demanded that such investments, made in
the past, should now be reduced. The other Trustees argued that by following
this policy, the Trustees would not be acting in the best interests
of the beneficiaries of the pension fund, and they asked the court to
direct them to approve a pension scheme which disregarded these restrictions.
The elements in the judgement which are of general application are summarised
below.
- The duty of
Trustees to exercise their powers in the best interests of the present
and future beneficiaries is paramount. When the purpose of the trust
is to provide financial benefits for the beneficiaries, as is usually
the case, the best interests of the beneficiaries are normally their
best financial interests. The judgement declares that a power of investment
must be exercised to yield the best return for the beneficiaries,
judged in relation to the risks of the investments in question, and
the prospects of the yield of income and capital appreciation have
both to be considered in judging the return from the investment.
- On the question
of whether non-financial considerations should be taken into account,
the court said:
"In
considering what investments to make Trustees must put on one side
their own personal interest and views. Trustees may have strongly
held social or political views. They may be firmly opposed to any
form of investment in South Africa or other countries, or they may
object to any form of investment in companies concerned with alcohol,
tobacco, armaments or many other things. In the conduct of their own
affairs, of course, they are free to abstain from making any such
investments. Yet if, under a trust, investments of this type would
be more beneficial to the beneficiaries than other investments, the
Trustees must not refrain from making the investments by reason of
the views that they hold"
- The Court also
reiterated the sentiments expressed in such cases as Roberts v.
Hopwood mentioned above to the effect that the standard required
of a trustee in exercising his powers of investment is that he should
take "care of an ordinary prudent man if he was making an investment
for the benefit of other people for whom he felt morally bound to
provide". The judgement goes on to make it clear that the duty is
not discharged merely by showing that the trustee had acted "in good
faith and sincerity", as "honesty and sincerity are not the same as
prudence and reasonableness. Some of the most sincere people are the
most unreasonable".
This
decision still remains in force; was repeated in Circular 24/83 by
the Secretary of State for the Environment who stated that the Administrating
Authority should pay due regard to this principle and was also included
within the current CIPFA Guidance referred to above.
The
Fiduciary Duty
- The Audit Commission
have special powers to inspect and to protect the interests of council
taxpayers to ensure that the Local Authority has acted lawfully in its
financial transactions. Elected Members are no longer susceptible to
surcharge for negligence or misconduct which has now been replaced by
the concept of wilful misconduct. Wilful misconduct was defined as "deliberately
doing something which is wrong, knowing it to be wrong, or with reckless
indifference as to whether it is wrong or not" (Graham v Teesdale (1981)
) 81 LFR 117. It is generally held that wrongful omissions fall within
the same category as wrongful acts.
- Elected Members
who are also Trustees of a pension scheme retain this responsibility
not to engage in "wilful misconduct" and have the additional responsibility
to have regard to their statutory obligation under the Superannuation
Regulations and the obligations outlined in the case law above i.e.
a duty to conduct the administration of the pension scheme in a fair
business like manner with reasonable care, skill and caution and with
a due and alert regard to the interest of others. These obligations
are therefore higher than simply weighing up decisions and coming to
a reasonable conclusion. There is an implicit expectation that proper
care and skill will be applied in making decisions relating to the pension
scheme. This is reinforced by the obligations to take proper advice
at reasonable intervals and in addition to have regard to the investment
principles as specified by CIPFA.
- In addition the
Pensions Ombudsman will investigate complaints of maladministration
that has caused injustice to a party. Maladministration is defined as
involving "bias, neglect, inattention, delay, incompetence, ineptitude,
perversity, turpitude, arbitrariness and so on". The injustice does
not only mean financial loss but it may include such things as distress,
delay or inconvenience.
Elected
Members Liability
- Elected Members
are covered by an insurance policy arranged by Oxfordshire County Council
whereby Members are indemnified against their legal liability for financial
loss occasioned by any negligent act or accidental error or omission
on the part of the Council, its employees or Members committed in good
faith. The indemnity is up to £5,000,000.
- In many cases,
failure to comply with the statutory provisions can result in a fine
being levied against an individual or against the Authority and where
appropriate, criminal breaches of the provisions could result in prosecution.
Training
- As will be noted
from above, Elected Members of the Pension Fund Committee are expected
to exercise due diligence, skill and expertise. Elected Members may
at some point be required to demonstrate how they have acquired sufficient
skill and expertise and how they have kept up to date with developments
in superannuation matters. Participation in relevant and approved training
courses would be the most obvious and effective way of having clear
and demonstratable evidence of such necessary skills and expertise.
- The Employers
Organisation for Local Government have provided specific guidance and
Elected Members attention is specifically drawn to Pension Scheme administration:
compliance with statutory requirements and timescales (LGPC Bulletin
No 15 – September 2001). Attendance at LGPC Training might be regarded
as ensuring the minimum requirements of training are met under the new
legislation.
- Member training
was specifically addressed in the business plan that was approved at
the Pension Fund Committee meeting on the 21 February 2003, Member training
budget was significantly increased in recognition of the importance
of developing Member skills and knowledge.
- The Committee
is RECOMMENDED to note the report.
P
G CLARK
Head of Legal
Services andSolicitor
to the Council
Background
Papers
Contact
Officer: Peter Clark, Head of Legal Services & Solicitor to
the Council, Tel: (01865) 815363
May
2003
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