John Clancy and David Bailey have blogged about the enormity of the wrong to the West Midlands council tax-payer by the LGPS.
Mike Olley
This is not news to this blog, it’s a smouldering issue that’s not going on; it’s a big scandal that has not been addressed and infuriates people outside the pension bubble.
The LGPS needs to get a grip on its responsibilities and return un-needed money to councils so council tax payers get the services they have paid for. The LGPS pension fund does not need to be over-funded, indeed it is a scandal that the Wolverhampton is bust while its pension scheme has an £11bn surplus (see blog by Clancy and Bailey).
Surpluses and deficits are immediate for council treasurers but abstract for the LGPS who can and should manage its finances over generations.
How Clancy and Bailey see the LGPS
Clancy and Bailey may be a bit harsh for pension folk. They are followed up by Mike Olley on Linked in who writes to pension people- with the same message
There is no “prudence” in holding back money that has been paid into a pension scheme unnecessarily by ordinary people though high council taxes. That high council taxes leave Birmingham bereft of the services council tax payers rightfully expect is shameful. But when the shame of lack of services could be righted by the return of money that should not have been taken and is not needed by the pension funds, then there is a scandal.
Professional Pensions is right to pick up on this and pension people have a chance to have their say to ensure that the LGPS do not continue to sit on dead money.
In this week’s Pensions Buzz, PP wants to know if councils should offer Local Government Pension Scheme contribution holidays to fund services.
It is not enough to sit on our hands and pretend that this is not our problem. What is happening in the West Midlands is a disaster for pension’s reputation everywhere
The situation in the West Midlands has been replicated throughout the entire DB pension universe, but with much more disastrous consequences in the private sector.
Deficit recovery contributions have been demanded and contribution rates have been calculated on a basis that totally disregards the actual investments of the pension scheme and investment returns secured or reasonably anticipated. Secondly the model substitutes the projected actual liabilities of the scheme with a liability measure based on a single historic spot measure of an asset class which long term and short time has been highly volatile and because of market concentration carries the greatest systemic risk.
Worse still the resulting over-valuation of deficits (and possibly now the over-valuation of surpluses) has resulted in unjustified deficit recovery contributions which all too often have led to the demise of the employer with its consequences for growth. Even where the employer has weathered the storm, it is likely to have closed accrual of DB pensions, substituting a pension promise that requires 60% greater pension contributions (according to Torsten Bell) to achieve the same outcome in terms of annual pension.
Worse still the “pensions industry” encouraged pension schemes to hedge the irrelevant valuation assumption and not the real cash liabilities of the pension scheme through LDI in its various forms.
It is reasonable to assume that investment to match the cash flow commitments of the pension scheme would have generated something like the LGPS current revised assumption of a 6.5% p.a. investment return. Compare this to the actual investment returns achieved over the past 5 years by LDI hedged pension schemes. This should have be considered by Trustee Boards and Regulators even if only for a Best Estimate or Neutral valuation to which a risk premium could be applied.
What has made matters worse is that the current Gilt yield has been gifted to the insurance companies as the basis for their pricing model for their commercial profit generating bulk purchase annuities products. I cannot immediately think of another situation where the customer tells the supplier how much to charge!
What has happened to those profits and how much do they contribute to the UK economy?
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LGPS consolidation is a bad thing, and all know it is simply a ruse to gain control of and to direct investment (most likely to support the gilt market – somebody has to) or just a Royal Mail type confiscation.
But the behaviour (for quite some time now) of many LGPS’s has / is shocking and that alone merits the consolidation.
They’ve operated like mini-fiefdoms behind the opacity of self-created pension complexity, and used their (misplaced) but considerable powers to suck money unnecessarily (and without mercy on private sector employers with the bad luck to be admitted) out of employers and local authority employers and the local economy.
As PensionOldie notes, this WMPF situation is repeated throughout the LGPS universe across the UK.
Strathclyde for instance in sitting on a surplus of £13 – £14bn, where like Birmingham public services are being cut and the economy, growth and jobs (unless public sector or universities) is dire.
The people of Birmingham / Glasgow etc should not be having to chose between jobs or pensions – the surpluses should be used to provide immediate contribution holidays to all employers, and a significant element used to invest in and kickstart the local economies from whence the funding came and belongs too.
Tice’s Reform proposals are misplaced – each of the LGPS funds can and should be a wonderful supportive source of investment, an attraction for employment and for providing decent pensions in retirement for public sector workers. But the behaviour of the LGPS will hasten their demise, whether via Tice or Bell’s consolidation (and what will inevitably flow from that).
Not too late – the LGPS’s need leadership and a voice.