The leader of Birmingham City Council is calling on the West Midlands Local Government Pension Fund (WMPF) to stop using external investment managers after a Centre for Policy Studies report hit out at ‘excessive’ charges across the Local Government Pension Scheme (LGPS).
BCC leader John Clancy said the scale of fees paid in management costs by WMPF, which were £86.3m in 2014-15 and £74.9m in 2015-16, were unacceptable. He called for management of the fund should be brought in-house to save money.
The study by the Centre for Policy Studies, authored by CPS fellow Michael Johnson, hits out at “dysfunctional governance” and an “absence of accountability” across the LGPS. Clancy has backed policy recommendations in the report including the replacement of active management of investments with passive management, arguing this could be used by councils to fund essential public services and pay for improved social care. He is also backing Johnson’s call for all 89 schemes to be rolled into a single scheme, effectively a sovereign wealth fund, with the assets being used to deliver housing and infrastructure for local authorities.
The CPS report urges the Government to remove a requirement on local government pension fund trustees to take advice before making an investment. If investment managers are to be used, the study recommends performance-related fees and not to hire any fund manager whose fees are tied to the size of the assets under management.
The study found that over the past decade assets held by the 89 funds under-performed the major UK and global equity and bond indices. The funds would have grown at a faster rate through passive investing – placing money in ‘tracker’ funds which simply copy the performance of stock markets.
Birmingham City Council expects to be required to pay about £125 million to WMPF this year, including top-up fees to cover a projected deficit. Clancy says WMPF is “sucking in” money from Birmingham and the six other West Midlands metropolitan councils that could be better spent paying for social care and other services at risk of being cut as a result of cuts in Government grant to local authorities.
Earlier this year Cllr Clancy called for an investigation into management fees paid by WMPF. The future level of fees, according to WMPF’s accounts, are projected in 2017-18 to be £76.6m, rising in 2018-19 to £80.4m, to £84.4m in 2019-20 and then £88.5m in 2020-21. Clancy believes that the West Midlands scheme has paid £1bn to managers over the past ten years, an estimate he says has not been challenged by WMPF. He contrasts the figure with the West Yorkshire Local Government Pension Fund, whose management expenses over the same period were £70 million. Both funds are of a similar size and cover urban metropolitan council areas.
All of West Yorkshire’s investment advice is ‘in-house’. But the West Midlands fund farms out 60 per cent of its investment advice to City-based analysts.
The CPS study highlights West Yorkshire as being unique amongst the 89 funds in that its entire investment portfolio is managed in-house, and it also benefits from scale economies. The result, according to the CPS, is “dramatically lower costs”.
Clancy says: “The Centre for Policy Studies report is a vindication of what I have been saying for a long time – local government pension schemes across the country and here in the West Midlands are a dysfunctional mess and not fit for purpose.
“There is no need to hire investment managers at all. But the brutal truth is that funds up and down the country have happily spewed out hundreds of millions of pounds to City advisers for no real return whatsoever.
“This is a national disgrace, which is sucking money from local authorities at a time when public services are under threat as never before. If investment managers do not add value to a fund, they should not be paid.
“The CPS report is suggesting fees paid unnecessarily should be claimed back, in which case, Birmingham wants its money back. In any case, it is clear there is no need for WMPF to be requiring councils to stump up about £80m a year to cover management fees.”