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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

1. 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.
2. 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

3. 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 –

1. to the need for diversification of investment of fund money,
2. to the suitability of investments which they propose to make, and
3. to proper advice, obtained at reasonable intervals.
   
   
4. 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.
5. 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).
6. The principal regulations relating to eligibility membership contributions and benefits and payments are specifically set out in the Local Government Pension Scheme Regulations 1997.
7. 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)

8. 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."

9. 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

10. 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

11. (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.

1. 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.
2. 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"

3. 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".

12. 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.
13. 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.
14. 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

15. 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.
16. 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

17. 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.
18. 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.
19. 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.
20. 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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