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Birmingham council hit by £88.5m pension deficit bill as financial crisis deepens

Birmingham council hit by £88.5m pension deficit bill as financial crisis deepens

🕔17.Feb 2014

Just when Birmingham City Council thought its financial woes couldn’t get any worse, they have.

Despite public services being cut left right and centre, the council now has to find an additional £88.5 million to plug a huge deficit in its staff pension fund.

Labour council leaders are even considering using civic buildings and other assets as collateral should the West Midlands Local Government Pension Fund continue to under-perform and fail to meet investment return targets.

Such a move could potentially put at risk the assets, which would have to be sold if the black hole in the fund deepened or the council could not meet future deficit payments.

The latest accounts reveal a £2 billion deficit in Birmingham’s share of the West Midlands fund –the projected shortfall when future and current pension liabilities are taken into account.

It’s also emerged that the fund has paid out £27 million in the past two years in investment management fees even though returns on investment have been under target.

By contrast, the West Yorkshire Pension Fund, which is a similar size to the West Midlands, paid out just £1.8 million in investment management fees last year and made a bigger return on investments than the West Midlands fund.

Birmingham’s £88.5 million deficit contribution payment will be staggered over four years.

In 2014-15 the council must find £17.7 million. In 2015-16 the figure rises to £23.5 million. The following year, 2016-17, the payment will be £23 million, and in 2017-18 it is £24.3 million.

The figures are on top of almost £100 million a year the council already pays into the fund.

It is possible that staff contributions will also have to be increased. The West Midlands Local Government Pension Fund will publish a detailed valuation and deficit calculations on April 1.

The requirement to come up with large deficit payments could hardly have come at a worse time for the council, which is proposing to cut spending by £85 million in 2014-15 and axe 1,000 jobs. The local authority also faces a £1.1 billion equal pay compensation bill, and has warned that some public services will have to be axed in 2015-16.

The deficit payment was seized upon by Labour councillor John Clancy, who will challenge Sir Albert Bore for the council leadership in May. Cllr Clancy is a long-time critic of the way local government pension funds are run and believes that billions of pounds locked up in investment should be ploughed into local regeneration and job creation.

Cllr Clancy said: “I was astonished to learn that the city council proposes paying an extra £17million to the West Midlands Local Government Pension Fund. And then more than that each year for the following three years.

“The fund has come back to us demanding more because, according to the budget document, there have been ‘lower than expected investment returns’.

“Let’s be clear, this is an extremely healthy and wealthy fund with £10 billion of assets in investment all over the world, and not enough here in the UK and in the West Midlands itself.

“This basic fund hardly gets touched by pensioners’ payouts. Contributions from local government workers have met payments out in pensions every year for decades and have been in considerable surplus over the last decade.

“We need to get to a situation where the taxpayers and citizens are not paying a penny piece more than the normal employers’ pension payments. This is no time for the council to be having to find £17million out of depleted budgets.

“The negotiations should have placed the boot firmly on the other foot.

“The fund should have found its own way to fill the apparent deficit by cutting the exorbitant amount it is currently paying in Investment Management Fees. Over the past two years it has paid out £27million to its managers for not very good investment management.

“That should have gone into the fund. And continuing to do that for the next 22 years would eradicate any supposed deficit.

“If the fund’s investments have failed to perform, we shouldn’t have paid the fund managers a penny. I say cut out the middle man and stick the money they were paying out in fees into the fund instead. That would save the city council from plugging the gap in times of austerity.

“The real crisis in local government pension funds is the amount that is being leeched out from the main funds for investment management expenses for, in many cases, awful performance.”

Details of the deficit are contained in the council business plan and budget for 2014-plus.

The report blames the fund’s poor performance on “lower than expected investment returns in the current economic climate” and adds that the deficit will have to be addressed through additional lump sum contributions.

The document discloses that the council has provisionally reached agreement with the West Midlands Pension Fund about a recovery plan. The agreement is subject to the council developing a new “asset-backed arrangement”.

The report continues: “This could potentially provide additional funding and security to the fund in the event that anticipated investment returns are not achieved and additional funding is required from 2017.

“An asset –backed arrangement would involve some appropriate city council buildings and land in effect being held as collateral. Any such new scheme would be taken through cabinet before being enacted.”

The council’s deputy chief executive, Paul Dransfield, told Chamberlain Files that discussions about an asset-backed funding arrangement were at an early stage.

Mr Dransfield said: “The statements in the Business Plan & Budget 2014+ concerning pensions include reference to discussions about potential asset-backed arrangements, although it is made clear that this could be pursued in the event that investment returns for the Pension Fund are not at the anticipated level.

“As such, discussions are still at a very early stage, and no commitment has yet been given, either in general or in relation to any specific assets.”

The West Midlands Local Government Pension Fund is run by Wolverhampton Council on behalf of all local authorities in the region.

In a recent press statement, the West Midlands Local Government Pension Fund urged council employees not to be alarmed over media coverage of the deficit. The fund’s trustees are working on a revised funding strategy that will see all of the region’s councils, including Birmingham, making hefty additional contributions to address the deficit.

Cover Image: Every Investor

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