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Officers jointly issue section 114 report over “unlawful” pension fund payments

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Officers jointly issue section 114 report over “unlawful” pension fund payments

Barnet Council's monitoring officer and its Section 151 officer have jointly issued a section 114 report after finding a series of payments in and out of its pension fund that they believed were unlawful.

The Monitoring Officer and Chief Finance Officer jointly issued the report under Section 5(2)(a) of the Local Government and Housing Act 1989 and Section 114 (2)(a) of the Local Government Finance Act 1988.

This type of section 114 report does not require the council to cease spending.

The report concerns a one-off payment made by the council of £20,477,000 to its pension fund in April 2020 ("the Prepayment") instead of secondary contributions for the years 2020/21, 2021/22 and 2022/23.

The London borough made this payment after being advised that a prepayment would save the council money compared with making secondary contributions over three years, according to the report.

Barnet also received leading counsel's advice that making the Prepayment was lawful in principle, the report noted.

The document said: "However, officers have not been able to trace any specific authorisation prior to the actual making of the Prepayment, whether by members, a committee or by an officer decision taken under delegated authority in accordance with the council's scheme of delegation.

"The scheme of delegation at this time did not cover making payments of this size.

"There is no authority from any committee of the council to make this payment."

It also noted that the payment was made contrary to the 'Rates and Adjustment Certificate', which sets the rates for contributions to the pension fund and is determined by the fund actuary.

After the Prepayment, the council continued to make periodic payments of (in effect) secondary contributions for the three financial years 2020/21, 2021/22 and 2022/23 ("Additional Payments").

The report said these were made contrary to the Rates and Adjustments Certificate.

"In effect, the Additional Payments would duplicate the Prepayment, and so officers also arranged that the Fund would repay most of the Additional Payment back to the Council in three annual repayments ('Repayments')", it continued.

Because of a lack of documentation and staff turnover, the monitoring officer and section 151 officer have not been able to understand clearly when or why the Additional Payments and Repayments were arranged.

"As far as the Monitoring Officer and current Section 151 Officer can tell, the most likely explanation is that, at the time, officers believed that the outcome of these fund flows would be advantageous for the council in accounting terms, while not being disadvantageous to the Fund.

"In any event, the Additional Payments were made and two of the three planned Repayments have also been made: £6,508,000 in October 2020 and £7,574,000 in October 2021."

The third repayment has not been repaid to the council but was planned to be £7,804,000.

The fund is currently holding this as an amount owed to the council pending the outcome of members' consideration of the report.

The Monitoring Officer and Section 151 Officer believe, as leading counsel advised at the time, that the Prepayment was lawful in principle, according to the report.

However, they have not been able to find the documentation to show that the actual payment was authorised under the council's scheme of delegation or by any council committee or that the proposal was approved by the Pension Fund Committee.

"For those reasons it appears to them, on the material currently available, that the Prepayment was not paid lawfully," the report added.

The Monitoring Officer and the Section 151 Officer are also of the view that the Additional Payments and the Repayments were unlawful "by reason of a failure to take appropriate advice before arranging them/making them".

The report said this finding was in line with the views of leading counsel.

The report added: "Even assuming that the Additional Payments and the Repayments were permissible in principle, and had a proper and lawful purpose, they were made without external professional advice, in particular from the Fund's actuary and tax advice, or as far as can be ascertained, specific internal consideration of the statutory scheme relating to payments into the Fund.

"The vast majority of local authority decisions will of course not be unreasonable simply because they were taken without specialist advice (whether external or internal), however pension arrangements are highly technical and indeed payments to the Fund, so far as they are dealt with expressly by the LGPS Regulations 2013, are governed by a Rates and Adjustments Certificate which must be drawn up by an actuary: reg 62(1)(c)."

The report set out different recommendations for Prepayment and the Additional Payments/Repayments.

On the Prepayment, the report found no issue about the lawfulness of the decision in principle and that it is currently "unnecessary" to ratify the making of the Prepayment.

Turning to the Additional Payments and the Repayments, the report highlighted three potential options:

  • to allow the fund to retain the planned third repayment, and for the council to reduce its employer contributions to the fund in the future so that they are reduced by approximately the amount of the third Repayment, with the result that the financial balance between the council as employer and the fund is broadly achieved.
  • for the Prepayment and the Repayments to be reversed
  • to make the third planned repayment via formal authorisation from the Pension Fund Committee.

According to the report, the matters came to the council's attention in 2024 and were later brought to the attention of two sets of external auditors.

Officers then reported the matter to the Governance, Audit, Risk Management and Standards Committee in 2024 and the Pension Fun Committee in early 2025.

Full council is set to consider the report today (28 January).

Adam Carey