Jacob Williams https://jacobwilliams.com

The long-awaited public interest report into Pembrokeshire County Council’s highly controversial ‘Pensions Arrangements’ has today been published by the Wales Audit Office.

In his very critical report, the WAO’s assistant auditor general for Wales, Anthony Barrett, maintains his view that the decision taken by the council’s Senior Staff Committee to allow senior council officers to avoid pension tax is ‘ultra vires,’ and that there have been numerous ‘failings in governance arrangements’ along the way.

The document does away with any prospect of doubt – in the Wales Audit Office’s view – that the ‘Pensions Arrangement’ adopted in 2011 is an ‘unlawful’ tax-dodge scheme, and says that several actions taken in relation to the scheme are also ‘contrary to law.’

So long has this report been awaited, that it will be useful to remind readers what it is commenting upon. The now-infamous tax-dodge scheme was introduced and approved during a behind-closed-doors meeting of the council’s Senior Staff Committee, convened by the chief executive in his office, on 28th September 2011. The offending resolution was made by the small committee of six senior councillors — Jamie Adams, John Davies, John Allen-Mirehouse, Stan Hudson, Sue Perkins, and the only ex-councillor, David Wildman — off the back of a scant report titled ‘Pensions Arrangements’ which failed to fill a whole sheet of A4 paper. It was co-authored by the Director of Finance and the Head of Human Resources, both potential beneficiaries of the scheme, and was discussed by the committee in the presence of the chief executive, who was the only council officer to avail himself of the scheme during the 2012/13 financial year, receiving £22,269.

The report before the committee – and the unlawful decision – were directly brought forward as a way to allow what the auditor describes as ‘certain senior officers’ of the authority to avoid tax, by circumventing the Finance Act 2011, which was brought in by the government to restrict the amount of pensions tax relief for individuals, by reducing both their annual and lifetime allowance.

Prior to the committee’s decision, senior officers were free to opt out of their Local Government Pension Scheme, but if they did, they would have lost out on their employer’s contributions – the money paid by the council into their LGPS pension pot. The committee’s decision to approve the tax-dodge scheme – which the auditor says is of an ‘unusual nature’ – allows senior officers who decide to drop out of their pension scheme to keep on receiving the benefit of the council’s contributions, by effectively allowing them to be received as a pay rise – which the auditor refers to as a ‘pay supplement’ – in the form of cash which they are free to do what they like with.

Mr. Barrett’s report holds that the committee’s decision ‘is ultra vires and cannot be lawfully implemented,’ and that the scheme, the way it was introduced and the actions taken by the council were unlawful for a whole host of reasons. A closer look at some of the key points follows, but here it is, in a nutshell:

The principle

“Avoidance/ mitigation of the effect of legislation is not a proper purpose for which a local authority may act. For that fundamental reason, the decision taken by the Council’s Senior Staff Committee on 28 September 2011 is ultra vires and cannot lawfully be implemented.”Essentially, the auditor finds that the very principle of the scheme is unlawful. It was introduced to give senior staff the option to avoid tax, but was actually implemented by the council’s misue of its powers to set staff pay levels, rendering the decision ‘ultra vires.’

Mr. Barrett says that a council would not be exercising its powers properly by increasing staff remuneration for “an extraneous or legally irrelevant purpose such as the avoidance or mitigation of the effect of restrictions in pensions legislation.”

It is common ground between the auditor and the council that the scheme was introduced to allow the highest paid officers the option to avoid ‘substantial tax liabilities’ – it could hardly be denied, as it’s one of the few stipulations within the short report to the committee.

Lack of information

The basis of the decision was set out in a report consisting of a few sentences on a single sheet of A4 paper, and nothing else. It claimed that the introduction of the tax-dodge scheme was essential to ‘aid recruitment and retention’ of senior staff, with the insinuation that officers would leave the authority or not be recruited into the authority, if they had no way of avoiding the new tax changes.

Mr. Barrett says that the report to councillors provided ‘no evidence’ to demonstrate that this was the case, ‘no information’ on how the new tax changes would impact on any staff members, ‘no information’ relating to the council’s equality duties, and, perhaps most glaringly, ‘no information’ on the legal implications of the scheme. As a member of the authority’s Corporate Governance Committee, I established at our September meeting that the reason for this was because no such advice was actually ever sought.

Officer involvement

“…the Director of Finance and Leisure and the Head of Human Resources whose report was before the committee have a disqualifying personal and pecuniary interest in the decision, as senior officers who were eligible to benefit from the proposed pay supplement.
In addition, the Chief Executive and Head of Human Resources were present at the meeting and did not make any declaration of interest.”Today’s highly critical report also discusses – in a helpful level of detail – the implications arising from the involvement of senior officers who were direct potential beneficiaries of the scheme, in its introduction and adoption. The report holds that officer involvement alone would have rendered the decision ‘ultra vires.’

The level of detail provided by Mr. Barrett is helpful, because at September’s Corporate Governance meeting, opposition members scrutinised the involvement of senior officers in the decision, and, in particular, the fact that the chief executive – who was the only council employee during 2012/13 to take up the scheme – took part in the meeting by remaining present during the discussion of this item.

Members were told during September’s Corporate Governance meeting, quite unconvincingly, that there was no requirement for the chief executive to have declared an interest. A guidance note relating to section 117 of the Local Government Act was read out by the Head of Legal and Committee Services, implying that officers, on this occasion, didn’t have any interest to declare. It read:

“If an officer knows that a contract in which he has a pecuniary interest is before the authority, he must give notice of his interest to the authority. This does not apply to a contract with him in his own name, since the authority will then know of his interest.”

As I pointed out at the time, this tax-dodge scheme doesn’t relate to an individual’s contract, but a wholesale change of council policy relating to a bunch of its highest earners – which was introduced as a knee-jerk reaction to the imposition of higher tax levies. Nonetheless, it doesn’t appear to have convinced the auditor, either, who says:

“A person is disqualified from participation in a local authority decision-making process if there is a real possibility that he or she would be influenced by a pecuniary or personal interest in the outcome of the decision. Disqualification from participation applies to an officer providing written or oral advice to a decision-making committee or board.

Any pecuniary or personal interest has to be declared and an individual having such an interest is not entitled to participate in the decision-making process unless that interest is too remote or insignificant to matter. In general, the participation in a decisionmaking process of a single individual with a disqualifying interest will vitiate the decision arrived at…”

Before going on to make crystal clear that: “the decision-making process is wider than the decision itself and includes the presence of officers at a meeting. A person is disqualified from participation in a decision-making process if there is a real possibility that he or she would be influenced by a pecuniary or personal interest in the outcome of the decision. I am satisfied that officers took part in the decision-making process whilst having a disqualifying financial interest in the outcome of the decision.”

Not being followed

Even if the Senior Staff Committee’s decision to introduce the scheme was a lawful way of avoiding tax, the auditor finds that the decision has not been complied with. It was resolved on the proviso that the scheme “be made available to senior staff on the basis that no additional cost accrues to the Authority.” Up until now, this has been heralded by senior members at any given opportunity, in defence of the scheme.

Mr. Barrett finds that the scheme has incurred additional cost to the authority, chiefly because of the rate at which the opt-out tax-dodge contributions were paid: 14.7%. This figure is the rate at which payments are made by the council into an employee’s LGPS. It is made up of the employer’s contribution of 12%, with the additional 2.7% being a requirement to service future deficits and maintenance of the fund. The public interest report says “In my view, payment based on 14.7 per cent would allow the additional contribution [the 2.7%] to be paid to the Chief Executive, rather than paid into the pension fund. As a result, there would be some additional cost to the Council, as a future actuarial assessment would be based on fund assets that had not received the additional contributions.”

“In addition…” Mr. Barrett writes “…the Council also needs to consider the impact on national insurance contributions, as the national insurance contribution status of the Chief Executive has changed, following his opt out of the pension scheme.”

I can talk on this topic with some degree of involvement. I say involvement, rather than knowledge, because I’m no pensions or tax expert – and it seems I’m not the only one in County Hall. At the December meeting of council (item 37 – 3 hours, 5 minutes and 30 seconds in) I tabled a question to the council leader, Cllr. Jamie Adams, about this exact point. It was covered by the Western Mail. His answer, embellished with the sort of information only an officer could dream of penning, was that 14.7% was the correct rate to have been paid, and, in answer to my follow-up question, he disagreed that the authority was worse off and acting outside the resolution. It would be interesting to know if Mr. Barrett watched this webcast, but I can say with some level of confidence that Cllr. Adams would have been aware that this was one of the issues he was probing.

‘Indirect discrimination’

“In my view the quality of the process adopted by the Council was poor.”Even equality and discrimination issues arise within the auditor’s thorough report. There is a general duty on the council to have due regard to the following three aims: ‘the need to eliminate discrimination, the need to advance equality of opportunity and the need to foster good relations.’ Mr. Barrett says that the report to members of the Senior Staff Committee “does not address whether there were any equalities issues to be considered,” and that it appears no assessment was made of ‘the likely impact of the proposal’ on these three aims, and therefore there was a failure ‘to have due regard to the public sector equality duty.’

The decision was also ‘contrary to law’ because it constitutes ‘indirect discrimination.’ Both ‘younger employees and women employees are put at a disadvantage’ by the introduction of the scheme, as they are treated ‘less favourably than older employees and male employees’ because they are less likely to be eligible to benefit from ‘the approved pay supplement.’

What does the council say?

It’s too early to say how this report will be met by senior elected members or officers, however, there is a strong thread throughout the whole report which gives us a clue to the opposition Mr. Barrett faced in his task. It is a fascinating thread which suggests quite strongly that the council has sought to undermine Mr. Barrett’s authority, power, and ability, to do his task.

Even by Pembrokeshire County Council’s standards, the arrogance is astounding.

Mr. Barrett says that he shared his legal advice with the council, which had also received its own legal advice ‘in response,’ but he says the council “declined to provide that advice to me, stating that the ‘written advice is not suitable for disclosure and privilege is not waived’,” instead, the council gave him ‘a paper that sets out its position on each of the issues raised,’ in which the council does not accept that ‘the pay supplement is intrinsically unlawful.’

In something of a surprise to a mere backbench councillor like me, Mr. Barrett reveals that in September 2013, the council decided to ‘revisit its decision.’ This was news to me, and it’s made even more surprising because on the very last day of September, at the Corporate Governance committee showdown, officers and senior members revealed nothing of the sort, and made out just how wrong the auditor was in his concerns. It doesn’t appear to have come to anything, because Mr. Barrett remarks that he is “not aware that any action has yet been taken to address this.”

The report also reveals that the written submissions received by the Wales Audit Office from the members of the committee who made the decision in September 2011, ‘sought to justify’ the decision they had taken, whilst the response ‘the Council’ sent back, “puts forward the view, in a number of places, that these are not matters for the auditor.” Incredible!

On the topic of equality, we’re told: “The Council response refers to the discipline of the public sector equality duty lying in the quality, not the outcome, of the decisionmaking process. It argues that it is not the traditional role of an auditor to enforce discrimination law.”

On discrimination, we’re told: “The Council position paper points out that discrimination is a statutory tort, enforceable by an individual who may (normally within three months of the act complained of) bring a complaint that they have been discriminated against. It is the Council’s view that it is not for the auditor to assert individual claims not made by any individual.”

What next?

The auditor’s investigation was sparked during his inspection of the 2012/13 accounts after he became aware of a sudden stop in the council’s payments to the chief executive’s pension scheme. He says the scheme and the payments made by the council pursuant to it (amounting to over £50,000 by the end of the 2013/14 financial year, during which a second, unspecified employee took up the arrangement) are unlawful, and the council ‘should rescind the decision and withdraw the current option for senior staff, stopping any future payments.’

The council’s 2012/13 financial statements – approved using the ruling group’s bloc-vote in September – should also be re-approved by the authority’s Corporate Governance committee, and the unlawful payment to the chief executive should be fully disclosed within it. Interestingly, councillors were informed yesterday afternoon that the regular meeting of the Corporate Governance committee scheduled for the 10th February has been cancelled ‘as there is no business to be transacted.’

A full meeting of the council is legally required within one month, at which members will decide: whether the report requires the council to take any action, whether the recommendations in the report are to be accepted, and what action to take in response to the report and recommendations.

❏The same auditor has today also published two reports into separate matters at a neighbouring authority.

An apparently identical tax-dodge scheme introduced at Carmarthenshire County Council in 2011 has been the subject of a similar public interest report, as has a 2012 decision taken to grant the authority’s chief executive legal indemnity in pursuing a successful libel counter-claim against Carmarthenshire blogger, Jacqui Thompson.