Challenge of providing Best Value delivery
From last April, UK local authorities have had a duty to achieve ‘Best Value’ in their provision of services, which means they must meet clear standards of cost and quality using the most economic, efficient and effective means available.
This new performance benchmark is the government’s replacement for compulsory competitive tendering, which merely required local authorities to provide services at the lowest cost. Best Value is more about providing quality services at the right price, and local authorities have to show they are moving in the right direction by undertaking fundamental reviews of all their services over a five-year period.
The need to achieve Best Value has driven local-authority pension funds to consider different approaches in terms of administration, investment strategies and communication with scheme members.
Under the new regime, local authorities are required to publish an annual Best Value performance plan – a key public document that identifies each authority’s assessment of its past and current performance against nationally and locally defined standards and targets, and its vision of future priorities and targets for improvement. Trustees will have to show why and how a service is being provided, comparing it with the performance of other providers and consulting with local taxpayers and service users on how the service can be improved. The performance plan will be the main instrument by which authorities are held accountable by the local community for delivering Best Value.
External auditors appointed by the Audit Commission will review these performance plans on an annual basis. When appropriate, auditors could recommend amendments to a plan, suggest that the Audit Commission should undertake a Best Value inspection or even advise that the secretary of state should intervene.
“Best Value will lead to local authorities having to improve their pension service,” says Graeme Muir, partner in charge of the public sector practice at Glasgow-based consultancy firm Hymans Robertson. Muir believes that improving communication will be one of the most vital tasks.
The West Midlands pension fund, with more than £5bn (E8.3bn) under management, is fully committed to the government’s Best Value requirements and strongly believes in the benefits that they are bringing to public-sector pension funds.
“Best Value drives away the reliance of pension administrators on their own perception about how good they are as administrators and also about whether they are meeting the needs of their customers,” says Mike Woodall, chief pensions officer at the West Midlands fund, based in Wolverhampton. “Best Value means that you now have to be able to quantify and show by evidence what you are actually doing and compare this with the performance of other providers,” he adds.
“It’s not just like a weight-watchers club where you say ‘we are all overweight but I’m two pounds lighter than you’,” he says. “It’s more like a real slimming club where someone, looking at performance indicators, says to you ‘this is the weight you ought to be, and we are going to make sure you are that weight. Best Value is very evidential, and it really gets deep down into what local authorities are doing.”
This means that local authority pension funds have to be cost-effective, showing quality of performance and demonstrating they are adopting best-practice actions through a whole range of indicators. The West Midlands pension fund’s local performance plan includes a review of all the main services it provides. For instance, in terms of administration, the pension fund’s performance plan states that it aims to provide an administration service that delivers value for money by comparing the unit cost per scheme member with that of other best-practice pension funds in the private or public sector.
“Best Value is forcing pension funds to make sure they have asked their members about the services provided and find out if any improvements should be made,” Woodall says. “You have to go back to the basics of how you work, look at what you are trying to achieve and make sure you are doing it in the most effective way.”
At the Greater Manchester pension fund, which has more than £6bn in assets, Ged Dale, head of pensions administration, agrees. “At the heart of Best Value lie our customers and rather than assuming that we know what they want, we are putting a lot of effort into consulting them.”
In terms of costs, achieving Best Value is helping to improve pension funds’ performance. “In our pension fund we have been reducing costs for the past six years and while doing that our performance and the quality of our services has improved. This demonstrates that Best Value and working more effectively can drive costs down,” says Woodall. “Based on our situation in 1994, today’s cost per head in real terms would have been £25 but it’s actually £17.60 per head, and this makes a big difference.”
In the investment arena, defining best practice and achieving Best Value is a much more complicated issue. “It’s more difficult to say what effect Best Value will have on the investment side,” says Hymans Robertson’s Muir. “I suspect it might lead to an even more unwelcome focus on short-termism, as short-term underperformance leads to more pressure for manager reviews,” he says.
Comparing pension funds’ performance results can be a problem since they may depend on asset structures linked to specific liabilities, making it difficult to compare them on the same basis. In its response to the Myners Review of institutional investment, the National Association of Pension Funds (NAPF), which represents the majority of the local authorities that participate in the local government pension scheme (LGPS), showed its concern about how Best Value could be applied to pension fund performance.
The NAPF stated that Best Value indicators encourage comparison of investment results across funds in a simplistic way, without taking into account individual circumstances. In addition to this, the NAPF believes that the time horizons of Best Value are not always conducive to a long-term investment outlook
“Best Value is affecting investments in a more complex or sophisticated way,” says Woodall at the West Midlands fund. “For the past few years we have been seeing pension funds changing their investment managers in search of added value, and this is related to the Best Value concept. For instance, some funds have changed from active to passive management because they realised that passive management was giving better returns at the same time as avoiding fund management charges,” he says.
In this area, the West Midlands pension fund’s performance plan indicates a commitment to achieving investment-return objectives, making sure that the five and 10-year investment returns at least match the results of other funds.
These criteria are helping trustees to adopt different strategies by finding out how their investments could work more effectively. “For instance, we have recently gone into stock lending, which has resulted in £1.6m worth of income per year,” he says. “This is something that we could have done a few years ago but we didn’t. But I think that by considering this option now we have definitively achieved Best Value.”
However, strategies that work in one place may not be ideal for another, although local-authority pension funds are looking more and more closely at what their colleagues in other regions of the country are doing. And indeed, co-operation will be fundamental to the success or failure of Best Value.
“Local authorities must address Best Value both individually and collectively,” says Steve Freer, chief executive of the Chartered Institute of Public Finance and Accountancy (Cipfa). “Co-operation between authorities is more important than ever before.”
He adds: “There is a limit to the progress that authorities can achieve if they take a blinkered approach to Best Value. Part of the challenge is about getting heads up, about identifying good ideas in other organisations and importing them. In the medium term, more formal joint ventures between authorities are likely to emerge as part of the response to Best Value.”
In this respect, Greater Manchester pension fund’s Dale says: “Best Value also encourages benchmarking, but to identify best practice as well as to compare costs. To this end we have formed a benchmarking club with the other local government metropolitan pension funds, as well as participating in Cipfa’s club and Pals – Pensions Authorities Large Schemes. Our closer association with other large funds may also lead to co-operative ventures, such as pooling resources to improve trustee training.”
West Midlands’ Woodall agrees: “We don’t think that our approach to Best Value has to be necessarily the best one for other local authorities but there are other pension funds that haven’t been as quick in identifying best practice as we have.” He adds: “Some of them may follow our lead. Sharing best practice is one of the good things about pensions administration. We don’t keep our achievements for ourselves, we share in order to improve the pensions environment as a whole.”
The London Pensions Fund Authority (LPFA) is also committed to Best Value. It will publish its first Best Value performance plan early next year and is already well on its way to implementing the new regime’s requirements. The LPFA aims to become a provider of Best Value solutions for other local authorities.
In general, despite concerns about how the investment side will work, UK local authorities have welcomed Best Value as a catalyst for everyone to try to operate at the best-practice level. Now it will be interesting to see whether small funds will be able to meet the Best Value requirements or, as most people think, they will have to outsource services to larger pension funds. “Already some local-government pension schemes are doing the administration for smaller funds and I suspect there will be pressure for this to increase,” says Hymans Robertson’s Muir.