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ITEM PF13
PENSION
FUND COMMITTEE - 24 NOVEMBER 2006
OXFORD CITY
COUNCIL MOTION INVESTMENT AND REPRESENTATION
Report by
County Solicitor and Head of Democratic Services
Introduction
- The Oxford City
Council passed a Motion at its meeting on 26 June 2006 in which it requested
that the County Council should direct its investments in a fashion that
would promote the social good and should not invest in the arms trade
and requested that three Member nominated representatives, elected by
employee contributors to the scheme, should sit on the Pension Fund
Committee with full voting rights (full text of the motion is set out
in the Annex) (Download as .doc
file). The Pension Fund Committee was advised of this at its
last meeting and noted that a report would be submitted to this meeting
of the Committee. This report considers the issues raised by the motion
in more detail.
- The County Solicitor
provided a detailed summary of the duties and responsibilities of the
Pension Fund Committee Members on 23 May 2003. This report updates that
report to take into account changes in the law and to address some concerns
in relation to the nature and type of certain investments, which are
currently invested by the Pension Fund.
- Local Government
Pension Schemes are administered under the 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 the LGPS 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 9 of
the Local Government Pension Scheme (Management and Investment of Funds)
Regulations 1998, which requires the administering authority to invest
fund monies which are not needed immediately and power is included to
vary the pension fund investments. The Regulations contain a requirement
for an investment policy to be formulated with a view:
- to the advisability
of investing funds in a wide variety of investments,
- to the suitability
of particular investments and types of investments, and
- to obtain proper
advice, obtained at reasonable intervals about the investments.
- Regulation 6 expressly
authorises administering authorities to appoint one or more investment
managers to manage and invest the fund for them, 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.
- 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 Decision Making in the Local Government Pension
Scheme in the United Kingdom (Issue No 5 April 2002)
- CIPFA’s Pension
Panel has issued guidance notes on LGPS pension fund decision making.
This guidance seeks to meet the need under the Local Government Pension
Scheme (Amendment) (No 2) Regulations 2005, which requires each Administering
Authority to publish a governance policy statement. This statement should
fully describe and explain the Administering Authority’s arrangements
for the delegation of their functions, the frequency of Committee Meetings,
Terms of Reference and operational procedures of such delegations and
the extent of scheme member representation on Committees. The Pension
Fund Committee on 24 February 2006 formally approved a governance statement
as required under the Local Government Pension Scheme (Amendment) (No
2) Regulations 2005.
- 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 Funds. 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 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 investments 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
- 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 a correct statement of the law and has
been considered and approved in a large number of subsequent cases.
The decision was reproduced in Circular 24/83 by the Secretary of
State for the Environment who stated that the Administering Authority
should pay due regard to this principle and was also included within
the current CIPFA Guidance on decision making 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 and co-opted
Members are covered by an insurance policy arranged by Oxfordshire County
Council whereby they 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
- Members of the
Pension Fund Committee are expected to exercise due diligence, skill
and expertise. 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 will be the most obvious and
effective way of having clear and demonstratable evidence of such necessary
knowledge and understanding in order for members to carry out their
duties and evaluate critically any advice they receive.
- Democratic Services
organise general training for all County Council Members. In addition,
the Pension Fund Committee agrees a more specific member training programme
and budget each year in February to take effect for the following financial
year. This training is organised by the Finance and Procurement Service.
There are a number of external member training courses and conferences
held throughout the year and members are encouraged to attend these.
Internal training courses have also been introduced and these are normally
held immediately before Pension Fund Committee meetings. In addition
to training courses, officers regularly send out newsletters, which
include training articles or newspaper cuttings of topical interest.
City Council Motion Investment
in Arms Companies
- The Oxford City
Council’s motion raises the issue of investment in arms companies and
requests that the County Council should direct its investments in a
fashion that will promote the social good and should not invest in the
arms trade. The legal position regarding pension fund investment is
a complex area as is evident from the content of this report. Nevertheless,
the Trustees of the Pension Fund have a primary duty to act in the best
financial interests of the beneficiaries ie. pensioners and future pensioners.
The Oxfordshire Pension Fund has a policy on socially responsible investment,
which states the following:
"The
Council requires its Fund Managers to monitor and assess the social,
environmental and ethical considerations, which may impact on the reputation
of a particular company when selecting and retaining investments, and
to engage with companies on these issues where appropriate. The Council
believes that the operation of such a policy will ensure the sustainability
of the company’s earnings and hence its merits as an investment: it
will also assess the company’s sensitivity to its various stakeholders."
- The policy is,
therefore, one of engagement with companies and not the out-right exclusion
of stocks. Indeed, excluding specific stocks based purely on ethical
considerations might well constitute a breach of the Trustee’s duty
of care as the Cowan case so clearly demonstrated.
- Reference has
been made to other organisations which have decided not to invest in
certain companies because of similar ethical concerns. It is accepted
that charities administering their pension funds might well find that
some investments would be contrary to their charitable purpose. For
example, a temperance society could justifiably not wish to invest in
breweries, the Society of Friends not to invest in armaments and cancer
research not to invest in tobacco. Indeed, such investments might well
place the charity at risk of losing future contributions and donations
from its supporters. The Court felt that such instances would be rare
and that the general rule was that Trustees must maximise returns on
investment for the benefit of its members. Local Authorities, however,
are more akin to the Cowan and Scargill type case rather than charities.
Local Authorities are public bodies and have very wide investment powers
and the actions of Mr Scargill and others was to seek to restrict those
investment powers, which was what the Courts found objectionable. There
is a clear case, however, that choices can be made with regards to investments
which can take into account ethical considerations so long as there
is no significant financial detriment. It is for that reason that Trustees
must have regard to its own policy on socially responsible investment.
Request for Additional
Representation on the Pension Fund Committee
- The Oxford City
Council’s motion also requests that three Member nominated representatives,
elected by employee contributors to the scheme, should sit on the Pension
Fund Committee with full voting rights.
Government Consultation
on Governance Arrangements
- The Committee
should be aware that the Department for Communities and Local Government
recently undertook a consultation exercise reviewing the governance
arrangements of all local government pension schemes which ended on
6 October 2006. The Department envisages undertaking a statutory consultation
exercise later in the year on specific proposals.
- In the light of
the impending consultation, officers suggest that the Committee should
not, at this stage, make any decisions on the composition of the Committee
but should await the Government’s proposals on the local governance
arrangements of the LGPS.
- If, however, the
Committee wishes to make a decision at this meeting on the City Council’s
request, the Committee needs to bear in mind the following issues:
Existing Regulations
on Membership
- Under Section
102 of the Local Government Act 1972, it is for the appointing Council
to decide upon the number of Members of the Committee and their terms
of office. They may include Committee Members who are not Members of
the appointing Council and such Members may be given voting rights by
virtue of Section 13 of the Local Government and Housing Act 1989. It
is, therefore, open to the Pension Fund Committee to include representatives
as voting Members on the Committee providing they are eligible to be
Committee Members.
- 65% of the total
membership of the fund are Oxfordshire County Council scheme members.
In considering the City Council’s request to allow three additional
voting member nominated representatives, the Committee should be mindful
that, by virtue of Section 80 of the Local Government Act 1972, County
Council employees are disqualified from being members of a committee
of the Council.
Beneficiaries’ Observer
- In 1986 the Finance
& General Purposes Sub-Committee agreed to invite a representative
of the beneficiaries to attend and speak but not vote at meetings of
the then Investment Sub-Committee. Since then, a beneficiaries observer
has attended meetings of the Pension Fund Committee and its predecessors
in this capacity. The beneficiaries observer represents the present
contributors, pensioners and deferred beneficiaries.
Existing Coopted Membership
- In addition to
the County Councilor membership on the Committee, there are two co-opted
members with full voting rights nominated by the Oxfordshire district
councils.
RECOMMENDATION
- The Committee
is RECOMMENDED:
- to
continue to act within its agreed Statement of Investment Principles
in the best interests of the Scheme;
- in
the light of the Government’s proposal to undertake statutory
consultation on the local governance arrangements of the LGPS,
to defer consideration of the City Council’s request about membership
until the governance arrangements have been determined.
P
G CLARK
Head of Legal
Services and County Solicitor
DEREK
BISHOP
Head of Democratic
Services
Background
Papers Nil
Contact Officer: Peter Clark, Head of Legal Services & County Solicitor,
Tel: (01865) 815363
November
2006
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