I’m sure there are plenty of things that Michael Johnson and John Clancy don’t see eye to eye on. Johnson is a Research Fellow at the right-leaning Centre for Policy Studies; Clancy is a Labour councillor and leader of Birmingham City Council.
What they do agree on though is that Britain’s Local Government Pension Scheme is a complete mess.
Johnson has just authored a CPS report on the LGPS, which is responsible for paying retirement funds of more than 5 million current and former council workers. The report claims the LGPS has paid out a mind-boggling £9 billion in fees and charges over the past decade — about half of which have been hidden.
Those costs, the report finds, as a proportion of asset market value, have more than doubled in the ten years to 2016.
Of course, none of this would particular matter if the LGPS had delivered stellar returns. But it hasn’t. In fact, after costs, it has consistently and substantially underperformed the major UK and global equity and bond indices over the ten-year period.
To quote Michael Johnson, “active management of the Local Government Pension Scheme’s assets has been an expensive folly.”
Cllr Clancy is none too impressed either. “The Centre for Policy Studies report,” he says, “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.”
As a business rate tax payer in Birmingham myself I can indeed confirm that public services here are severely stretched. For instance, we have a stunning new library which the council can’t afford to keep open all day. Across the West Midlands region, dozens of libraries are having to be closed.
Yet according to the CPS report, the West Midlands Pension Fund has paid around £1 billion to City of London fund managers and investment consultants over the last decade. Its costs this year are expected to rise to around £125 million.
In June 2014, a report commissioned by the Department for Communities and Local Government found that by switching from active to passive management, the LGPS could save an estimated £660 million in costs every year, and still deliver similar, if not better, returns. Shamefully, the fund industry has lobbied so hard against that proposed change that it is no longer on the agenda.
Make no mistake. Johnson and Clancy are right. The LGPS is a national disgrace.
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Robin is a journalist and campaigner for positive change in global investing. He runs Regis Media, a niche provider of content marketing for financial advice firms with an evidence-based investment philosophy. He also works as a consultant to other disruptive firms in the investing sector.
