Council pension fund fees: The multi-billion-pound scandal TEBI warned about for years
- Robin Powell
- 1 day ago
- 9 min read
Councils across Britain are closing libraries, cutting children's services, and issuing bankruptcy notices whilst simultaneously handing billions to underperforming fund managers.
The bitter irony couldn't be starker. As local authorities slash £6.2 billion from essential services over the next two years — forcing vulnerable families to lose support whilst potholes go unfilled — they continue paying eye-watering fees to City investment firms that consistently fail to justify their costs.
Against this backdrop of brutal austerity, where central government funding for local authorities declined by almost 60 per cent between 2010 and 2020, Reform UK has launched a blistering attack on what it calls "egregious" council pension fund fees. The party claims local authorities wasting billions of pounds through poor investment decisions and excessive charges whilst cutting essential services to the bone.
The timing is devastating. Birmingham City Council issued a Section 114 notice in September 2023, effectively declaring bankruptcy and forcing drastic service cuts. Nottingham followed in November, reducing library hours and laying off staff. Somerset Council declared a financial emergency with a £100 million deficit. Yet throughout this crisis, these same councils continued paying premium fees to fund managers who consistently underperform simple market indices.
Reform's research focuses on 13 councils where they hold influence, including Lancashire, Kent, and Staffordshire, which together manage £66 billion in assets. According to Deputy Leader Richard Tice's analysis, these funds have underperformed by an average of 1.9 per cent annually since 2019, whilst paying average fees of 0.5 per cent when they could achieve similar results for roughly 0.1 per cent.
"For too long, British taxpayers have been taken for mugs," Tice declared at a press conference, describing the expenditure as "enormous" and the fees as "frankly egregious." He estimates the 13 funds are overpaying by roughly £265 million annually, scaling this to suggest over £1 billion in wasted fees across the entire Local Government Pension Scheme.
Reform's broader claims are staggering: inadequate performance has cost between £8 billion and £10 billion over five years, with Tice arguing there is "no accountability, no responsibility" in a system that allows taxpayers to be "ripped off."
The party proposes capping illiquid investments at 10 per cent and moving most assets into low-cost global equity index and bond trackers. Reform even plans to establish its own pension pool, with Tice claiming "we think we can do better" than existing arrangements.
"For too long, British taxpayers have been taken for mugs." — Richard Tice, Deputy Leader, Reform UK
Industry pushes back hard
The financial services sector has responded defensively to Reform's intervention. Independent pensions consultant John Ralfe dismissed Reform's figures as "made-up numbers," whilst industry trade body Pensions UK predictably defended the status quo.
Pensions UK director Zoe Alexander pointed to 8.9 per cent aggregate returns in 2024 and average funding levels of 108 per cent, arguing the scheme is "one of the most successful pension schemes in the world." But Alexander's defence misses the fundamental point: the issue isn't whether LGPS performs adequately, but whether it delivers optimal value when councils are desperately cutting essential services.
The government also distanced itself from Reform's claims. The Ministry of Housing, Communities and Local Government stated: "We do not recognise these claims about the Local Government Pension Scheme, and are absolutely committed to making sure it provides value for money."
Union leaders joined the criticism, with Unison general secretary Christina McAnea warning that "forcing council staff on to inferior pensions would leave retired workers worse off." She dismissed Reform's figures as having been "plucked out of the air."
A first for me: agreeing with Reform UK
This represents something of a personal milestone. After decades of writing about financial markets, I've finally found myself agreeing with a Reform UK policy position. It's not a sentence I ever expected to write, but Tice's diagnosis of systematic waste in council pension fund fees aligns remarkably with evidence I've been presenting for over a decade.
However, there's one significant error in Reform's narrative. Tice claims nobody has been talking about this issue, suggesting his party discovered a hidden scandal. This couldn't be further from the truth.
The voices that have been crying in the wilderness
Since 2014, a small but persistent group of researchers, analysts, and advocates have documented exactly the problems Reform UK now claims to have discovered. Their warnings, backed by rigorous academic research, have been consistently ignored by policymakers seduced by financial industry promises.
TEBI has been at the forefront of this campaign, highlighting systematic waste plaguing local authority pension schemes. We've published dozens of articles exposing how councils hand billions to underperforming fund managers whilst taxpayers pick up the bill through higher contributions and reduced services.
Michael Johnson at the Centre for Policy Studies conducted groundbreaking research exposing a "lost decade" of underperformance between 2006 and 2016. His analysis showed LGPS funds handed over £4.5 billion in fees whilst being outperformed by basic market indices. Former Birmingham City Council leader John Clancy provided crucial insider perspectives on political pressures that maintain expensive, underperforming strategies. David Bailey from Birmingham Business School contributed academic analysis demonstrating systematic failure of active management approaches.
The definitive moment came in March 2014, when consultancy firm Hymans Robertson delivered a government-commissioned analysis that devastated the case for active management. Their central finding was unambiguous: across LGPS funds, active management "generally did not deliver sufficient extra return to justify its higher cost."
The report identified potential annual savings of £660 million if councils switched significantly towards passive management. This included £230 million yearly from greater use of passive funds, £240 million from eliminating expensive "fund-of-funds" layers, and £190 million from reducing portfolio turnover.
The UK Government explicitly acknowledged that "a wholesale shift to passive would not have damaged returns in aggregate." Yet after intense financial industry lobbying, the government opted for a face-saving compromise: "pooling" assets rather than embracing evidence-based passive investing.
When the data becomes undeniable
Reform's findings, whilst politically motivated, validate what critics have documented for years. The scale becomes clear when examining recent fee escalation: LGPS management costs almost doubled from 26 basis points to 49 basis points in 2022-23, taking total annual fees to £1.75 billion. Over the past decade, the scheme has paid out £11.3 billion to fund managers.
Despite much-vaunted "pooling" reforms that created eight asset pools between 2018-2022, generating claimed savings of over £1 billion, Reform still identifies £265 million in annual overpayments across just 13 funds. If this pattern holds across the entire £400 billion scheme, the waste becomes astronomical.
The numbers validate long-standing concerns about a system that prioritises complexity over results. Michael Johnson documented the bureaucratic burden: one year of LGPS annual reports spans 8,186 pages, supplemented by 4,670 pages of policies and statements, plus 3,769 pages of valuation reports. That's over 16,000 pages of documentation for a single occupational pension scheme.
"Perhaps worst of all," Johnson observes, "the reporting avalanche does not provide transparency. One fund's annual report shows a single investment of £250 million, yet within its 102 pages, there is no clue as to what that asset is."
Simple beats sophisticated every time
The most compelling evidence comes from success stories that prove simpler approaches deliver superior results within the existing LGPS framework.
Kensington and Chelsea's vindication
Council leader Quentin Marshall transformed Kensington and Chelsea's £1.9 billion pension scheme into the UK's best-performing local authority fund through radical simplicity. His 10.8 per cent average annual returns over the past decade outstrip every other council in Britain — the only local authority to achieve double-digit returns.
Marshall's approach validates everything Reform UK now advocates: half the fund sits in a BlackRock MSCI World Index tracker, with virtually no tactical decision-making. "Individual stock or fund selection, tactical decision-making — all three of those things, post risks and post costs, definitely do not add value," he explains.
His assessment of the asset management industry is withering: "The whole asset management industry is built on the premise that they have value." Marshall particularly targets consultants who "rely on backward looking data which is definitely shown to be completely and utterly useless as a source of prediction."
The Conservative councillor and private banker attributes success to "making few decisions." His team meets formally once yearly to review strategy, but allocation has remained "broadly unchanged for many years." When considering infrastructure investments — beloved of policymakers — Marshall rejected them due to "very high manager fees, very little diversification versus existing asset classes."
This approach delivered extraordinary outcomes. Kensington and Chelsea was the only UK local authority achieving double-digit annual returns over the past decade. The second-best performer, Bromley Council, trailed at 9.3 per cent. The fund now enjoys funding levels exceeding 200 per cent, allowing reduced contributions that free money for essential local services.
"Individual stock or fund selection, tactical decision-making — all three of those things, post risks and post costs, definitely do not add value." — Quentin Marshall, pension fund chairman, Kensington & Chelsea Council
Nevada's global template
Across the Atlantic, Nevada's Public Employees' Retirement System provides an even more dramatic illustration of simplicity scaling to institutional size. Until recently managed by a single investment officer, the $53.2 billion fund focuses relentlessly on efficiency and cost control.
Chief Investment Officer Steve Edmundson's philosophy, articulated to the Wall Street Journal, encapsulates the evidence-based approach: "Do as little as possible, usually nothing." Apart from modest property and private equity holdings, the vast majority of Nevada PERS assets sit in passive equity and bond funds.
This approach consistently delivers returns comparable to the best-funded schemes whilst operating with minimal overhead. Nevada demonstrates that sophisticated institutional investment management is often expensive illusion—what matters is capturing market returns efficiently whilst minimising wealth-eroding fees.
Why the industry fought back so hard
The scale of lucrative business explains the financial services sector's determined resistance to evidence-based reform. Managing LGPS assets generates billions in annual revenues for fund management companies, consultants, and intermediaries who profit from complexity.
The "pooling" compromise preserved this essential structure. Rather than embracing low-cost index funds that could achieve 5 basis points or lower, the system maintains multiple layers of expensive active management. Pension committee members, typically local councillors with limited investment expertise, depend entirely on consultant advice from firms with commercial relationships with recommended fund managers.
This opacity serves industry interests by making meaningful oversight impossible. Reform UK's political intervention threatens a comfortable status quo where underperformance is explained away through sophisticated-sounding excuses whilst fees continue flowing regardless of results.
The human cost of financial waste
The real tragedy isn't abstract numbers on spreadsheets — it's closed libraries, reduced children's services, and vulnerable elderly people receiving inadequate care. When councils face impossible choices between filling potholes or paying fund manager bonuses, something has gone fundamentally wrong.
Consider the stark arithmetic: £1.8 billion in annual fee savings could fund the entire social care gap that's forcing councils into bankruptcy. Early intervention services for children have dropped by 45 per cent over 12 years, whilst 1,700 children are referred to social services daily across England. Meanwhile, fund managers collect their fees regardless of performance.
Marshall frames the stakes perfectly: "This is real money that will have a real impact on whether your local library will stay open and grandmother gets good care."
Council pension fund fees: the path forward
The solution remains exactly what Hymans Robertson recommended over a decade ago: embrace low-cost passive management for the vast majority of LGPS assets. Given the scheme's £400 billion scale, negotiating fees of 5 basis points or lower should be straightforward with major index providers.
Marshall's target allocation provides a sensible template: 75 per cent in equities, 20 per cent in property, and 5 per cent in index-linked bonds. The equity allocation should be predominantly passive global index funds, with property holdings focused on income-generating assets rather than speculative developments.
Nevada's approach offers a more radical template: create a sovereign wealth fund structure with Crown guarantee, bringing all LGPS assets in-house under professional management focused on capturing market returns efficiently.
Individual councils needn't wait for government reform. Kensington and Chelsea proves dramatic improvements are possible within existing structures. What's needed is courage to ignore consultant complexity and embrace boring simplicity that actually works.
Your money, your choice
Reform UK deserves credit for forcing political attention onto systematic waste that establishment parties have ignored. But the credit for identifying and documenting this scandal belongs to researchers, analysts, and advocates who have been warning about LGPS waste for over a decade.
The evidence has been clear since 2014: simple passive approaches outperform complex active management whilst dramatically reducing costs. What we've lacked isn't knowledge but political will to challenge vested interests profiting from the status quo.
Every pound saved on unnecessary council pension fund fees compounds over decades, creating wealth benefiting scheme members whilst freeing resources for cash-strapped local authorities. A £400 billion scheme paying 0.05 per cent instead of 0.5 per cent saves £1.8 billion annually—money that could prevent library closures, maintain children's services, and ensure proper care for vulnerable elderly people.
Now that council pension fund fees have finally gained political salience, perhaps we can move beyond industry lobbying towards evidence-based solutions serving taxpayers and scheme members rather than financial intermediaries who have extracted billions whilst communities suffer.
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