Time to slash City ‘fat cat’ pension fees to tackle social care crisis
The leader of Birmingham City Council is urging the Chancellor in his Budget to commit to using £1 billion in investment management fees paid by local government pension funds to tackle the social care funding crisis.
Councillor John Clancy said the huge sum given annually to City advisers by 89 council pension funds produced very poor results for local authorities and would be better used to bolster town hall spending on caring for older adults.
Writing on his blog, Cllr Clancy quoted new research into local government pension fund accounts for the entire UK, taking in Scotland and Northern Ireland as well as England and Wales and including the Transport for London fund. Management fees for 2015-16 alone were £1.015 billion, often for sub-standard investment performance.
Cllr Clancy said: “Over the past decade these funds have paid out in excess of £10 billion in investment management fees, a quite extraordinary figure.
“This wouldn’t be so bad if investment managers were adding value. Unfortunately, the funds have generated very poor returns for their members, despite thousands of millions of pounds being handed to city-based ‘experts’.
“The Government should make sure the funds bring investment management services back in-house, saving councils hundreds of millions of pounds in unnecessary contributions.
“If the Chancellor is serious about increasing spending on social care, he should look no further than the bloated fees paid to investment managers by local government pension funds. Councils like Birmingham end up paying these fees, but the money would be far better used to provide the social care our older citizens need and deserve.”
The West Midlands Local Government Pension Fund (WMPF), into which Birmingham City Council is being asked to pay about £125 million a year, is diverting a higher proportion of its assets to managers than the UK average.
The average spent on administration expenses by all UK funds during 2015-16 was 0.36 per cent. But WMPF managed to spend 0.60 per cent of its assets on advisers and managers.
WMPF trustees signed off £86.3 million in 2014-15 on management fees and were set to pay £74.9 million in 2015-16.
Cllr Clancy has compared the West Midlands’ fund performance with that of West Yorkshire, where all investment management is in-house.
WMPF paid at least £1 billion on management fees over the past decade. By contrast, the West Yorkshire Pension Fund’s management expenses over the same period were £70 million.
Cllr Clancy added: “One billion pounds versus £70 million, it just doesn’t make sense. The truth is that the WMPF would have delivered a better return simply by switching from active management to passive tracker funds, cutting management fees to the bare minimum.
“With £214 billion wrapped up in local government pension schemes, the time is right for the Government to consider ways in which cash locked up in the funds can be converted to provide investment at a time when local authorities are suffering severe and continuing cuts in Government grant.”