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Made in Birmingham council pension fund reform campaign gets FT backing

Made in Birmingham council pension fund reform campaign gets FT backing

🕔30.Mar 2015

A Birmingham city councillor’s campaign to reform Britain’s ‘failing’ local government pension funds has been taken up by the Financial Times.

The respected broadsheet newspaper highlighted research by John Clancy demonstrating how the UK’s 89 separate council pension schemes are wasting hundreds of millions of pounds a year on excessive fees to investment managers for poor advice.

In his book The Secret Wealth Garden Clancy argues that reforming the way the pension funds are run and amalgamating many of the smaller schemes could easily save the public purse £2.2 billion, which could be spent by councils on regeneration schemes and job creation.

At the moment councils are paying almost £500 million a year to City ‘experts’ for investment advice that has typically produced returns little better than could have been achieved by placing pension funds in a high street bank deposit account.

The West Midlands Local Government Pension Scheme paid £64 million to investment managers between 2007 and 2013 in an attempt to get better returns than the market average.

But the scheme gained just 4.3 per cent more over the period than would have been obtained had the fund been placed in an interest-bearing deposit account – an average additional return of less than one per cent a year for £64 million.

Last year Birmingham city council had to find about £80 million as a contribution towards plugging a projected deficit in the West Midlands Local Government Pension Scheme.

Clancy, a Labour councillor for Quinton, is urging the Government to legislate to limit the amount that can be paid to investment managers to 0.02 per cent of the total value of a pension fund.

He says that would give Britain’s 100 local government pension funds an additional £2.2 billion over the five-year lifetime of a Parliament.

The Financial Times highlights the £656 million Waltham Forest pension fund as the worst offender. It spent £7.5 million (1.14 per cent of its assets) on investment costs last year.

The £1.38 billion Swansea pension fund spent £11.6 million (0.84 per cent of assets), while the £1.34 billion Shropshire pension fund spent £10.6 million (0.79 per cent of assets).

Cllr Clancy said any spend above 0.4 per cent of assets was “absolutely dreadful”.

I really cannot speculate as to how they could possibly defend [these costs].

David Blake, professor of pension economics at London’s Cass Business School, told the Financial Times the figures were “shocking”. He said:

The average local authority pension fund size is £2.3 billion and one would expect that funds of this size could negotiate much lower fees. Even more disturbing is the range of fees, from 1.14 per cent to virtually nothing.

Council taxpayers who underwrite these costs are getting a very bad deal, indirectly paying extortionate fees to the fund managers of those schemes.

Analysis shows that the high level of fees often did not translate into better performance. Many funds with a similar size and asset class mix paid very different fees for near identical performance.

The £765 million Hammersmith and Fulham pension fund spent £4.9 million on investment costs last year and achieved a 6.4 per cent return. The £775 million Enfield pension fund spent just £1.3 million on investment costs for an identical return.

Michael Johnson, research fellow at the Centre for Policy Studies, the think-tank, questioned the aptitude of the trustees and investment consultants who oversee the funds. He said:

The whole governance framework is laughable. Many of the individuals involved lack the ability to ask penetrating questions and demand useful answers. The LGPS is in a bloody mess [given] the complete breakdown in governance and the deeply entrenched vested interests.

Kieran Quinn, chairman of the £13.2 billion Greater Manchester pension fund, which spent just under 0.1 per cent (£12.9 million) of its assets on fees last year, admitted there are serious governance concerns at many local authority funds. He said:

If somebody is paying excessive money for failure then it is absolutely right that both the people receiving the cheques and the people paying the cheques need to be challenged.

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