Patrick Tooher explains to Daily Mail readers in “This is Money”, the stupidity of the Birmingham’s LGPS management team. I have written about this over the past 18 months, often with the help of John Clancy. The Birmingham situation shows the arrogance of pension people that have allowed this situation to continue. Now the game is up- Reform UK are now in charge of Birmingham’s council.
Taxpayers ‘fleeced’ in Birmingham City Council pension fund blunder
Britain’s largest local authority overpaid more than £600 million into its pension fund after being ordered to pump the emergency cash into a hole that ‘never existed‘ leaving taxpayers ‘fleeced‘, its former leader claimed this weekend.
Birmingham City Council, which until last week was run by Labour for 14 years, declared itself effectively bankrupt in 2023 after being handed a huge bill to settle historical equal pay claims made by thousands of female workers.
It made swingeing cuts to public services to cover the costs in a move that led to the ongoing 14-month bin strike.
However, the cash-strapped council would have staved off bankruptcy but for an accounting blunder by its pension fund managers that led to unnecessary top-up payments into the scheme, said former council leader and public sector pensions expert Professor John Clancy.
‘It’s scandalous but the greater scandal is the lack of public scrutiny that allowed this to happen,’
he told The Mail on Sunday.
Clancy claims West Midlands Pension Fund, which manages the council’s retirement plan, miscalculated over a decade how much it should pay into the pot to repair an apparent funding shortfall in the scheme.
The formula – known as the discount rate – is based on the expected return on investments such as equities and bonds, which in Birmingham’s case averaged a decent 6.5 per cent a year.
But the fund’s managers used a much lower discount rate of over 4 per cent, meaning its liabilities – the current cost of paying future pension promises – looked much larger than they should have been, plunging the council’s fund into the red.
Birmingham City Council and hundreds of other employers were told to increase their contributions to the pension fund to eliminate the illusory deficit
West Midlands Pension Fund is part of the £550 billion local government pension scheme (LGPS), which pays its 7 million council workers past and present a guaranteed pension based on their final or career average salary.
The LGPS is increasingly under the sway of Reform UK after making big gains in last week’s local elections. It wants to turn the scheme into a sovereign wealth fund that would ‘patriotically back Britain‘ by investing in home-grown companies and projects.
Reform’s Richard Tice also wants to use some of the LGPS’ £150 billion surplus to cut council tax by reducing town hall pension contributions. Latest figures show West Midlands Pension Fund had a £4.3 billion surplus last year, of which £1.1 billion belongs to Birmingham, calculates Clancy, who led the council between 2015 and 2017.
More than half should be handed back to taxpayers who were ‘fleeced‘, he argues.
West Midlands Pension Fund now accepts
‘the pension fund assets were increasing by 6.5 per cent a year, meaning a deficit never existed because they should have used that figure every year,’
he added.
The West Midlands Pension Fund said it ‘did not recognise the figures quoted’ without elaborating, adding its approach was ‘informed by independent professional advice‘ and it operated ‘within a robust governance framework’.
‘Some of the commentary referenced does not accurately reflect the regulatory framework, statutory valuation process or long-term responsibilities of the fund,’
a spokesman said.
My comment
Come off it Birmingham’s LGPS management. For 14 months rubbish has sat on the streets of your City. As the bags spill rotten debris, an unspent surplus sits in your pension scheme.
You put in demands on council workers and council tax payers to avoid a fictitious pension deficit. Because of guarantees, these pension payments had to be prioritised at the expense of basic services that could not be provided because the City had run out of money.
I do not like Reform’s plans and hope they come to nought. Other parts of the LGPS who are faced with the same choices as Birmingham . They should learn from the lesson that Patrick Tooher spells out.
Clancy’s analysis is fundamentally misleading. It is true that by his figures assets have grown over the 2016-2026 decade from £3.3 billion to £6.2 billion, an average rate of increase of 6.5%. However, that £6.2 billion figure includes ordinary contributions of £810 million and deficit repair contributions of £483 million and that reduces the notional value of investment assets to £4.9 billion, an average rate of increase of just 4,0%.
If the Birmingham LGPS only achieved a 4.0% return over the decade 2016-2026 it must have had a high proportion in Gilts or other low yielding investments. Over that decade a balanced passively invested pension scheme have achieved average investment returns in the range of 6.5% to 8% p.a.
However for Birmingham Council read all other employers whose DB pension scheme contributions have been based on an assumption of gilt returns, especially during a period of quantative easing. It has been the bond based valuation approach that has unnecessarily sucked so much out UK employers into the hands of non UK investors and financial institutions. This has been a disaster for the British economy by raising employment costs disproportionately.
I worry that we are repeating this mistake by focusing on DC arrangements for current and future workers. After all as the Government has stated DB and CDC are likely to be 60% more efficient in turning contributions into retirement income!
Unlike CDC, with DB it is the employer who gains from good investment performance by the pension scheme with a reduction in its future employment costs. This support to existing employers should surely do more for the Government’s growth agenda than the mandation of a proportion of the investments of DC Mastertrusts, with their shorter time horizons, coupled with a compulsory increase in employer contributions required to address pension adequacy.
It would be good for the benefit of good performance to sit with members and not sucked out as surplus. We often think of the negatives of poor performance and must trust our long term assumptions which should be generally the same between the various CDC schemes.
I expect that transparency will make it clear who is relying on higher growth assumptions and who is being over-cautious. This will become a way to judge the CDC.
As for the price of LGPS to employers, this should be over time be dictated by the success of investment. I don’t see any correlation between investment performance and the cost of LGPS in Birmingham, this looks like being based on a very silly discount rate on liabilities.