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Scandal of council pension funds: £2.2 billion paid to City could regenerate regional economies

Scandal of council pension funds: £2.2 billion paid to City could regenerate regional economies

🕔14.May 2014

Radical reforms to the way Britain’s local government pension schemes are administered could generate £2.2 billion to create jobs and kick-start depressed regional economies, according to ground-breaking research by a Birmingham city councillor.

John Clancy has published a book – The Secret Wealth Garden – in which he shows how councils are wasting money by 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.

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.

He wants the £2.2 billion to be ploughed into Regional Investment Bonds to be issued by new Regional Investment Banks. The bonds could also be issued by Combined Authorities, such as Greater Manchester or a future Greater Birmingham, for investment in housing and transport.

Clancy, who later this month will challenge Sir Albert Bore for the leadership of Birmingham City council, examined the accounts of every local government pension fund in the UK for the past seven years, trawling through more than 700 sets of figures.

This is believed to be the first time research on such a scale has been undertaken, and the first time that the true state of council pension funds has been understood.

Clancy’s main proposals are:

– Amend local government investment regulations to require a 10 per cent shift of investments away from riskier foreign equities (stocks and shares) and property towards new holdings in regional and local investment bonds issued by regional banks, local councils, combined authorities, city-region authorities.

– Save on administration fees by consolidating over 100 local government pension funds into eight super-funds based on regions. A Midland fund would have £30 billion in assets and would be the world’s 17th largest pension fund.

– Change the way local government pension funds are valued to smooth out highs and lows, basing valuations on longer periods of time, eradicating projected deficits.

Clancy’s book has been passed to Shadow Pensions Secretary Rachel Reeves who will decide whether his proposals should form part of Labour’s manifesto at the next election.

Publication of the book coincides with consultation by the Department for Communities and Local Government into the future management of local authority pension funds. DCLG is considering one of Clancy’s proposals by asking for comments on a suggestion that the funds drop expensive investment managers and simply place their money into passive funds which track stock markets. This would save £420 million a year, according to DCLG.

In his book Clancy likens investment managers to bad gardeners, driven by a herd mentality, who make the same mistakes and produce miserable returns for pension funds.

He reveals that UK local government pension schemes have paid £2.7 billion in fees to investment managers since 2007. The funds returned an annual growth rate of 4.4 per cent compared with 3.3 per cent return if the money had been invested in a bank savings account.

Cllr Clancy said: “Over the past six years investment management fees paid out from the local government pension funds have amounted to a colossal £2.8 billion. Nice work if you can get it. In this secret garden the sun always seems to be shining.

“This has to be the killer fact: across the whole of the UKLGPS £2.7 billion in fees were paid in six years for just an annual average one percentage point above the simple savings deposit rate.

“I have shown that councils across the country are simply being fleeced by pension trustees who are demanding additional payments from councils amounting to hundreds of millions of pounds to cover supposed deficits.

“And in a double whammy of bad news, the councils are paying over the odds for poor investment advice. It’s time to end this scandal and use the £220 billion sitting festering in local council pension funds to kick-start regeneration and create much needed jobs.”

Cllr Clancy added: “An incoming Labour government could kick-start serious regional growth and a major national house-building programme without going near the UK taxpayer and whilst keeping the public spending envelope largely untouched.

“The much-needed major national house building programme, regional infrastructure and transport, and regional business investment through Regional Investment Banks could be funded, not by direct government or taxpayer funding, but simply moving around assets from unproductive and risky investment in global equities and into the regional economies instead.”

Facts about the West Midlands Local Government Pension Scheme:

  • Assets – £10 billion
  • Fees paid to investment managers since 2007 – £64 million
  • Six-year return on investments – 25.8 per cent, which is just 4.3 per cent better than what could have been achieved by placing the entire fund in a bank deposit account.
  • Where the West Midlands Pension Fund was paying £26 million 2011-2013 for its investment management fees for a return of 12 per cent, West Yorkshire was paying only £3 million for a return of 13 per cent.

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