Hertfordshire County Council s2

HERTFORDSHIRE COUNTY COUNCIL Agenda Item No: PENSIONS COMMITTEE TUESDAY 14th JUNE 2011 AT 10AM 6

GOVERNANCE POLICY AND COMPLIANCE STATEMENT

Report of the Director Resources & Performance

Author of the report : Patrick Towey (Telephone: 01992 555148)

1. Purpose of the Report

1.1 To present an updated Governance Policy and Compliance Statement to the Committee for comment and approval.

2. Summary

2.1 The Local Government Pension Scheme Regulations require that a governance compliance statement forms part of the governance policy statement. This statement was last revised on 18th March 2009.

2.2 The Investment Sub-Committee was created and approved by the Investment Committee on 29th September 2010 to review the investment strategy for the Fund and undertake ad-hoc projects in the future. The review of the investment strategy has now concluded and a proposed new strategy is tabled before this Committee in a separate paper titled “Pension Investment Strategy Review” [Agenda Item 9].

2.3 The County Council at its meeting on the 17th May 2011 changed the name of the Investment Committee to the Pensions Committee and at the same time established the Investment Sub-Committee with 5 members. The remit of the Investment Sub-Committee is as follows: 1. To review the investment strategy and monitor the performance of the investment managers, and make recommendations as appropriate to the Pensions Committee. 2. To undertake future projects as determined by the Pensions Committee on matters within the Committee’s remit and make recommendations to the Committee.

2.4 The current Governance Policy and Compliance Statement needs to be updated to reflect the governance relationship between the Pensions Committee and the Investment Sub-Committee and their respective terms of reference.

2.5 In addition to the current remit of the Investment Sub-Committee it is proposed that the Pensions Committee delegates to the Investment Sub-Committee the authority to appoint and remove investment managers.

1 3. Recommendations

3.1 That the revised Governance Policy and Compliance Statement Appendix A is approved by the Pensions Committee.

3.2 The Pensions Committee delegates to the Investment Sub - Committee the authority to appoint and dismiss investment managers. All decisions made by the Investment Sub-Committee will formally be reported back to the Pensions Committee at its next meeting.

4. Background

4.1 The Committee first approved a Governance Policy Statement in March 2006 following the introduction of the requirement to publish such a statement in the Local Government Pension Scheme regulations.

4.2 In June 2007 the Local Government Pension Scheme regulations were amended again to introduce a requirement to extend the governance statement to show compliance with statutory guidance to be issued by the Secretary of State for Communities and Local Government. The requirement was to publish the revised statement by 1st March 2008. The Committee approved such a statement on 27th March 2008 on the basis of the draft guidance issued by the government Communities and Local Government department.

4.3 The current Governance Policy Statement was last updated on 18th March 2009 after the finalised version of the statutory guidance was received.

4.4The Pensions Committee at present meets on a quarterly basis to review the performance of the Fund, meet the investment managers, and review the administration of the Fund. The decision to delegate the review of the investment strategy to the Investment Sub-Committee has allowed the Investment Sub- Committee to meet on a more frequent basis outside the Pensions Committee calendar of meetings and conclude this review in a shorter time period.

4.5 The terms of reference for the Investment Sub-Committee allows it to review and monitor the performance of investment managers; however, it does not allow it to appoint and dismiss investment managers. Once the revised investment strategy has been approved by the Pensions Committee a procurement process will be implemented by officers, with the help of Mercer, to implement the new strategy. To facilitate the procurement process it is proposed that the authority to appoint and dismiss investment managers is delegated by the Pensions Committee to the Investment Sub-Committee.

5. Additions and Changes to the Statement

5.1 The terms of reference for both the Pensions Committee and the Investment Sub-Committee are highlighted in bold in the statement attached in Appendix A.

5.2 The compliance statement has been amended in Section A: Structure (c) and (d) to reflect the addition of the Investment Sub-Committee in the governance arrangements of the Fund.

2 5.3 The compliance statement has also been amended in Section F: Meetings (frequency/quorum) (a) to reflect the addition of the Investment Sub-Committee in the governance arrangements of the Fund.

6. Areas of continued non-compliance

6.1 There is one area of the statutory guidance where the Committee still does not comply and that is representation. The reasons for this are noted below for members’ information.

6.2 In section B (a) (i) the statutory guidance states that employing authorities should be represented. The Committee has representatives of the County and District Councils, but does not invite any other employers to be members of the Committee. CLG acknowledge in the guidance that it is not possible to accommodate all employers, which in Hertfordshire’s case is in excess of 175, but it states that all key stakeholders should be given the opportunity to be represented. The Committee decided in 2008 to continue with the current membership, but to invite any other employers to attend as observers if they wish. This offer has been made to the employers of the Fund, but none of them have taken it up yet.

6.3 Section B (a) (iii) on representation goes on to state that an independent professional observer could be invited to participate in the governance arrangements of the Fund to improve the public perception of the Committee and to independently assess the governance and management of risk. The Committee’s view in 2008 was that the costs of this would not be outweighed by any benefits.

3 4 APPENDIX A

APPENDIX A

Governance Policy and Compliance Statement

This statement is prepared in accordance with regulation 31 of the Local Government Pension Scheme (Administration) Regulations 2007 (as amended), which require administering authorities to maintain and publish a statement on its governance policy and its compliance with statutory guidance issued by the Secretary of State for Communities and Local Government.

Legal Framework The terms of the Local Government Pension Scheme are contained in three sets of regulations:  Local Government Pension Scheme (Benefits, Membership and Contributions) Regulations 2007 (as amended)  Local Government Pension Scheme (Administration) Regulations 2007 (as amended)  Local Government Pension Scheme (Transitional Provisions) Regulations 2007

They apply to employees of local authorities other than teachers, fire fighters and police. Other specified bodies providing public services are included by statute or may apply for admission.

Responsibility The Administering Authority for the Local Government Pension Scheme in Hertfordshire is Hertfordshire County Council. Management of the Local Government Pension Scheme is a non-executive function.

The Local Authority (Functions & Responsibilities) (England) Regulations 2000, state that the functions relating to the Local Government Pension Scheme are the responsibility of the full council. The County Council has delegated these functions to a pension committee, whose members can make decisions without reference to the full council. Some of the functions relating to investment management have been delegated by the Pensions Committee to the Investment Sub-Committee.

In parallel to this, the County Council has delegated functions relating to the Pension Fund to the County Council’s Director of Resources and Performance, as specified in Annex 3 (Responsibility for Functions) of Hertfordshire County Council’s Constitution.

Terms of Reference The Pensions Committee, Investment Sub-Committee and Director of Resources and Performance, are responsible for the functions set out in the following regulations:  Local Government Pension Scheme (Benefits, Membership and Contributions) Regulations 2007 (as amended)  Local Government Pension Scheme (Administration) Regulations 2007 (as amended)  Local Government Pension Scheme (Transitional Provisions) Regulations 2007  Local Government Pension Scheme (Management and Investment of Funds) Regulations 1998 (as amended).

5  Local Government (Early Termination of Employment) (Discretionary Compensation) Regulations 2006 (as amended)

To clarify this delegation, the Pensions Committee has agreed a protocol setting out the division of responsibility between itself, the Investment Sub-Committee and the Director of Resources and Performance. This states that the Pensions Committee is responsible for policy matters including:  Approval of asset allocation decisions  Setting Administering Authority discretions  Approval of the overall investment strategy of the Pension Fund  Approval and review of: - Statement of Investment Principles - Funding Strategy Statement - Governance Policy Statement - Communications Strategy Statement  Appointing (and, when necessary, dismissing) Investment Consultants  Appointing (and, when necessary, dismissing) the Pension Fund Actuary  Appointing (and, when necessary, dismissing) the Pension Fund Custodian  Reviewing the cost of investment management  Setting performance objectives for the Pension Fund

The Investment Sub-Committee is responsible for the following matters:  Monitoring the performance of Investment Managers and the investments made  Appointing (and, when necessary, dismissing) Investment Managers  Reviewing asset allocation decisions  Reviewing performance objectives for the Pension Fund

All other operational decisions to implement these policies are delegated to the County Council’s Director of Resources and Performance.

Representation The Pensions Committee is made up of eight County Council members (in proportion to the political representation of the full council), three (non-voting) District Council representatives elected by the Hertfordshire Local Government Association and three substitute members (one for each political party).

The Investment Sub-Committee is made up of five members (in proportion to the political representation of the full council split 4:1 plus one non-voting District Council representative).

The Chairman of the Pensions Committee will be ex-officio Chairman of the Sub- Committee and its membership will be appointed by the Council from within the membership of the Pensions Committee.

County Council members, as elected members of the Administering Authority, have voting rights in accordance with the Local Government (Committee and Political Groups) Regulations 1990 SI No 1553 5 (1)(d).

A staff representative, nominated by UNISON, is invited to attend meetings as an observer.

6 The County Council’s Director of Resources and Performance, attends meetings to advise the Pensions Committee.

An annual meeting is held for all employers in the Hertfordshire Pension Fund to inform them of decisions made and allow them to ask questions directly to the Pensions Committee, Officers and Pension Fund advisers.

Committee meetings and training The Pensions Committee meets once a quarter.

The Investment Sub-Committee will meet quarterly and on an ad-hoc basis.

An annual workshop, run by the Pension Fund’s Investment Consultant, is held for members of the Pensions Committee to provide members with on going training on pension and investment matters and to provide a forum to discuss and debate issues in more detail. Members of the Pensions Committee also attend ad-hoc training and seminars, receive briefing material and are encouraged to continuously develop their expertise. Induction training is offered to all new members of the Pensions Committee.

Compliance with Statutory Guidance The following table provides a summary of how the Pension Fund complies with the statutory guidance issued by the Secretary of State for Communities and Local Government.

Pension Fund Compliance Statement Principle Compliance and Comments

A. Structure a) The management of the administration of Full benefits and strategic management of fund assets clearly rests with the main committee established by the appointment Council. b) That representatives of participating LGPS employers, admitted bodies and scheme members (including pensioner and deferred Full members) are members of either the main or secondary committee established to underpin the work of the main committee. c) That where a secondary committee or panel Full has been established, the structure ensures effective communication across both levels. d) That where a secondary committee or panel Full has been established, at least one seat on the main committee is allocated for a member from the secondary committee or panel.

7 Pension Fund Compliance Statement Principle Compliance and Comments

B. Representation a) That all key stakeholders are afforded the opportunity to be represented within the main or secondary committee structure. These include:

i) employing authorities (including non- Partial scheme employers, e.g. admitted bodies): The County and District Councils, whose staff make up 79% of the active membership, are represented, but no other organisations are currently. All employers are invited to attend as observers if they wish and to attend the annual employers’ meeting.

ii) scheme members (including deferred and Full pensioner scheme members); UNISON has a place on the Pensions Committee to represent all Scheme members.

iii) independent professional observers, and No

The statutory guidance envisages “an independent professional observer could be invited to participate in the governance arrangements to enhance the experience, continuity, knowledge, impartiality and performance of committees”. There is no such member of the Pensions Committee at present.

iv) expert advisors (on an ad-hoc basis) Full

Mercer attends the Pensions Committee when appropriate. b) That where lay members sit on a main or Full secondary committee, they are treated equally in terms of access to papers and meetings, training and are given full opportunity to contribute to the decision making process, with or without voting rights

C. Selection and Role of Lay Members a) That committee or panel members are made Full fully aware of the status, role and function they are required to perform on either a main or secondary committee. b) That at the start of any meeting, committee Full members are invited to declare any financial or pecuniary interest related to specific matters on the agenda.

D. Voting Full a) The policy of individual administering authorities on voting rights is clear and The policy is clear that only County transparent, including the justification for not Council members can vote. The Pensions extending voting rights to each body or group Committee believes that the voting represented on main LGPS committees. arrangements are justified, because in practice the vast majority of decisions are reached by consensus.

E. Training/Facility Time/Expenses a) That in relation to the way in which statutory Full and related decisions are taken by the administering authority, there is a clear policy Training is provided internally and on training, facility time and reimbursement of externally and offered to all Pensions expenses in respect of members involved in Committee members. Reimbursement of the decision-making process. expenses is covered by the members’ allowance schemes in their authority. b) That where such a policy exists, it applies Full equally to all members of committees, sub- committees, advisory panels or any other form of secondary forum. c) That the administering authority considers the Partial adoption of annual training plans for committee members and maintains a log of all This area is in development. such training undertaken.

F. Meetings (frequency/quorum) a) That an administering authority’s main Full committee or committees meet at least quarterly. b) That an administering authority’s secondary Full committee or panel meet at least twice a year and is synchronised with the dates when the main committee sits. c) That administering authorities who do not Full include lay members in their formal governance arrangements, provide a forum An annual employers’ meeting is held to outside of those arrangements by which the update employers on Pension Fund interests of key stakeholders can be matters. represented.

G. Access a) That subject to any rules in the council’s Full constitution, all members of main and secondary committees or panels have equal access to committee papers, documents and advice that falls to be considered at meetings of the main committee.

H. Scope a) That administering authorities have taken Full steps to bring wider scheme issues within the scope of their governance arrangements. Issues relating to the funding and benefit structure are reported to the Pensions Committee.

I. Publicity a) That administering authorities have published Full details of their governance arrangements in such a way that stakeholders with an interest The Governance Policy Statement is in the way in which the scheme is governed, published in the Annual Report and can express an interest in wanting to be part of Statement of Accounts and on the Pension those arrangements. Fund website.