Friday 20 March 2015

Pension Fund Fury

I don't intend this post to be a defence or justification of public sector pensions nor an apology for the fact that both my husband and I are lucky enough to have one. I've been reading the MSE forums for long enough to grow a fairly thick skin about the predictable "gold plated public sector pension subsidised by the tax payer" stance taken by some posters on a regular basis (as an example latest rant here) , although I have found myself getting quite defensive at times when a seemingly innocent question about pension scheme rules will raise a hornets' nest of vitriol against the poster for happening to work in the public sector but not realising just how "lucky" they are. Of course there is a very valid point in there alongside all the "politics of envy" that gets displayed. (Please note - My tongue is pretty firmly in my cheek here as that particular phrase is very often used by exactly the same people but in quite a different context :-))

No truly, I do agree, public sector DB pensions are not sustainable and don't suit today's work patterns and life expectancy. However, the changing pension landscape will mean that public sector salaries will have to be raised to recruit and retain. For example my husband will retire from the Civil Service this year after doing 35 years during which he brought in tens of £millions of revenue. His final salary as a Higher Executive Officer was £32,000 and his pension is £12,000. He chose pension, job security and lower levels of stress (he's also had serious health problems in the past which might well have lost him his job in some parts of the private sector) but he did have to sacrifice salary. It was a choice, not luck.

But I digress and am in danger of doing exactly what I said I wasn't going to do so here is the real subject of this post: "A Pensions Patchwork" - BBC Radio 4. I was sent the link by a friend and have been feeling intermittently incensed ever since.

I don't expect anyone who isn't a member of the LGPS to have the staying power to listen to the whole 38 mins of the programme (although actually maybe you should as it turns out that it is your money that's getting wasted). But in case you're short on time here is the introduction:

"In Canada, everything is big - including powerful pension funds such as the Ontario Teachers fund which owns half of Birmingham airport and other large projects around the world. It's all a far cry from the British pension scene, where a hundred local government pension funds each run their own affairs separately and pay costly fees to City firms for investment advice. Many of them still have financial deficits. Taxpayers have been forced to pick up bills to pay off those shortfalls and already hard-pressed local services have been stretched further. Lesley Curwen investigates how these individual funds are run and asks whether we should have larger funds with cheaper costs - like Canada does. And she asks whether more councils should be using pension money to invest in housing and infrastructure as a way to boost their local economies?

And here are the main points I took away from the programme:
  • The LGPS is a "fractured, cumbersome" structure which, although it is to all intents and purposes one occupational pension scheme, is divided up into over 100 funds each having its own admin function, infrastructure and fund managers. 
  • On average the 89 funds in England and Wales are 21% underfunded which means there is a deficit of around £47 billion which can only get worse due to low interest rates and increasing life expectancy. The deficit has to be made up by the employer (ie the Local Authority and therefore the taxpayer).
  • Local Authorities are already struggling with massive cuts to their budgets and this is yet another pressure on those budgets.The example of Birmingham City Council is given. The Council needs to make £101 million cuts due to loss of funding and it also owes the West Midlands pension fund £23 million to make up a deficit. The cuts will impact the flagship new library which is well used by tourists and locals alike. Weekly opening hours will be cut from 70 down to 40. 90 staff will be made redundant.
  • The LGPS as a whole pays out a massive amount in fund management costs. A figure of £597 million is quoted for one year's costs and this figure does not include dealing costs which seem to be much higher than they need to be due to over trading by as much as 500%. Although there has been no detailed analysis made of the trading costs they could easily be adding another billion to fund management charges. 
  • Councillors are often ill-equipped to made informed investment decisions so they rarely challenge or question fund managers about performance.
  • John Clancy, a Birmingham councillor has studied the costs in more detail. He found that costs had gone up 20% in just one year although returns had halved. He discusses the issue further along with Michael Johnson from the Institute of Policy Studies in a blog post here
  • Unison officials are also very concerned and agree with financial experts who advise that larger, regional funds should be created which can then employ their own fund managers instead of paying independent managers and "funding the buildings in Canary Wharfe" .
  • The last words go to Michael Johnson who calls the LGPS a "national embarrassment" whose structure "acts to the detriment of members and taxpayers". Unfortunately he isn't hopeful of change any time soon because "the vested interests that oppose change... are very considerable....Imagine the screams of pain from the Investment Management Industry and bear in mind how political parties are funded in this country and draw your own conclusions".
This whole mess is made even more tragic given the fact that the majority of the members of the LGPS are fairly low paid workers (although there are some very highly paid managers at the top - in fact obscenely highly paid as ermines's recent post states). A typical pension for a fairly long serving worker is somewhere between £7,000 - £10,000 with a retirement age of 66. (My own will be around £9,000).

Despite public perception to the contrary, the true situation isn't a simple case of the typical local authority worker leeching the tax payer to fund her pension - that job is being done far more effectively (and cynically) by fund managers supplementing their already bloated salaries, aided and abetted by councillors making decisions on things of which they have very little knowledge.

28 comments:

  1. Great summary Cerridwen.

    I must have been on of the few who listened to the whole broadcast on R4 last week and I must admit to being astounded at the utter shambles of the situation.

    As you say, the schemes are fragmented and notionally the responsibility of elected local councillors who have little or no knowledge of finance or how the pensions industry operates. They in turn are 'guided' by pension industry experts.

    If these schemes were run efficiently, at low costs there would be many millions more in the coffers for local services, council tax could be lower and LG employees would get better pensions at the end of their working lives.

    The whole situation is a national disgrace!

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    1. Hi diy investor. Thanks.
      I agree totally. What's to be done though? That's the question.

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  2. I can sympathise with your anger, Cerridwen. Although having never worked in the public sector before, as diy investor says, if the schemes were run efficiently, local authorities would have more money in their coffers and that ultimately affects me and the local services I receive.

    Now that those horrendous fund management costs have been flagged up, is anything being done to reduce them?

    I hope none of this will have any real impact on your own pension.

    By the way, it's your birthday this weekend, isn't it?

    If so, Happy Birthday! :-)

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    1. Hi weenie,

      It's very true that how the money is managed affects us all and the services we receive. I don't know how, when or if things will change. Hopefully so, but I suspect things will move very slowly once they do get started.

      Thanks for remembering that I mentioned I would be away celebrating my birthday this weekend. My birthday itself was actually earlier in the week but I'm stretching the festivities out this year and spending an indulgent weekend in Bourton on the Water. We're there now just working out which restaurant to try for dinner :-)

      (I'm not too far away from where you'll be tomorrow - Hope the Gathering goes well :-))

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  3. Happy Birthday for the weekend, Cerridwen!

    Indeed, this is a good summary of the programme. Now that this shocking situation has come into the open, do you think there are going to be changes? Lots of determined people may be able to bring this about; it's ignorance and apathy that will preserve the status quo.

    I will confess to past ignorance over some excessive fees for my (and DH's) savings and deferred pension pots. (intense pressure of work was the excuse!).
    Now I have made sensible changes (Hurrah for Monevator!!) and I don't let any of them get away with anything. Only last week I was on the phone to the pension department of a certain blue chip company where the pension fund's performances were STILL only available up to 2012. Was I the only one of their many pension fund holders who actually noticed or cared?

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    1. Thanks for the birthday wishes Rowan Tree :-)

      Too true that apathy is a real cop out and to some extent those of us with a voice (ie those of us who are members of the scheme) have only got ourselves to blame if we don't at least try to instigate change. I feel a letter coming on - maybe something I could get signed by my colleagues too.

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  4. http://www.telegraph.co.uk/news/politics/conservative/11142105/Boris-Johnson-Britain-needs-gigantic-pension-funds-to-help-build-new-roads.html

    There's at least one senior British politician that agrees with you....

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    1. Thanks Matt.

      Hopefully this means that the spotlight is on and things might start moving in the right direction :-)

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  5. I think Birmingham City Council is a special case - having grown up there, I know several people who do/did work for them. Actually, many of my friends went to work for them. One girl in particular saw the trouble from the einside and got out before all the redundancies started.

    However, on many of your points I really agree. I do think we should have larger, regional funds. We do like to atomise things a lot in this country, and there are pros and cons to that, but in this case - there are way more cons I think.

    Also knew many people who worked for Suffolk council... and believe you me, there's a LOT of anger about the boss' salary. It really disgusts me to be honest. Getting paid more than the PM, ru freaking kidding me?

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  6. oh btw happy birthday - i remember you saying you couldn't come to the meet up because it was your birthday weekend. I hope we'll see you at the next one in the Summer?

    CHEERS

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    1. Thanks TV. There's another round of redundancies coming in my LA too. In fact I've managed to convince myself it wouldn't be too bad if I was one of them since I'm hoping to go in about 2 years anyway. I've no idea how those that are left will keep things going though.

      I certainly do hope to be at the next meet up. Has a date been set yet?

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    2. no date as yet, we are waiting for Weenie to let us know when she is going on holiday. I need her to be there so I can swap another homebrew with her, HAHA

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  7. Hi Cerridwen,

    "by councillors making decisions on things of which they have very little knowledge" - this is the scary part.

    I think there is big change coming - hopefully for the positive. Public schemes are currently run inefficiently - to the detriment of more that just the tax payer!

    Hope you feel better for unleashing some fury yourself :)

    Mr Z

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    1. Hi Mr Z,

      I did feel a little better - thanks.

      The world is full of the wrong people making wrong decisions and sometimes total retreat seems like the only sane option (only for a moment though - as Rowan Tree says "ignorance and apathy preserve the status quo").

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    2. If you think it's bad that councillors don't know anything, just think what our MPs are deciding on!

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  8. I've recently started working for local government, 7 months a go in face and of course I joined the LGPS. The WMPF in fact and the first thing I did when I got home was look at the allocation (which you can see here - http://www.wmpfonline.com/article/5648/Where-is-my-money-invested) and I was amazed by the number of holdings.

    The amount of money spent on fees and charges makes you sigh especially considering the scale and ferocity of funding cuts to councils, Birmingham in particular.



    p.s. Monevator sent me here :) Hi!

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  9. Hi Aron,
    Many thanks for commenting. Those documents are pretty astounding - I wonder how much trading is going on to manage all that lot. It makes you wonder why a few low cost trackers wouldn't do?
    (btw welcome to local government :-)

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  10. I don't get why people don't ask questions or are not more forceful in getting more transparency and details. Scary really.

    From my short time I in the job it's what I imagined it might be like, not quite Parks and Recreation level, but still pretty poor so I can see why these things happen. But people don't seem to want to take accountability or shake the cage.

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    1. It's probably a sign of the times Aron. I've worked in LG for a long time and have always felt part of an effective piece of machinery, delivering valuable services. Over the last few years things have changed and all that is pretty well broken and morale destroyed. Confidence in the "employer" has all but disappeared. Hence my race to early retirement. That doesn't mean things won't change again in the future though :-)

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  11. (friend emailed this article from Express article recently)
    Chris West, executive director of resources at Coventry City Council, has warned that over a third of funds from council tax will end up being spent on local council staff pensions by 2019. He says the council pensions system is "wholly unaffordable and unsustainable" and "almost no one feels able to say so." Mr West says unless council workers contribute more, pension terms may have to be changed. "As local authority budgets reduce and staff numbers fall, the overhead of pension costs falls on a smaller base and a smaller number of employees. This is unmanageable." A report by think-tank the Centre for Policy Studies in December warned "The Local Government Pension Scheme was 21% underfunded at the 2013 valuations. It is a national embarrassment." The Government is due to publish an overview of the accounts of the public sector which will also reveal the severity of the pensions shortfall in the National Health Service.

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    1. Thanks. That's shocking, especially considering that the scheme has just been overhauled. The fact that there are far fewer people paying in and a large number of early retired/redundant members should surely have been taken into account. All the more reason to make reducing the fees paid to fund managers an urgent priority.

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    2. Further interesting discussion on this here

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  12. Hello Cerridwen! I confess, I'm not really writing about this article - its just that you're obviously an mse-er, and so am I :) I'm a self employed counsellor, been that for so long, I've no experience at all of the modern jobs market. In the last six months, I've been learning about Financial Independence, which I think is a *wonderful* concept! Not many women writing about it in blogs, though, so I'm really pleased to find yours. Thanks!

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  13. Hi thanks for stopping by. You are right that there aren't as many female FI bloggers as there are male - women tend to tend to focus more on the money saving and bargain hunting side of things but I'm not sure if this says anything significant about a real difference between the sexes. I suspect there may be something about the mechanics/mathematics systems/patterns side of investing that appeals more to the male brain - but maybe that's too pat. Anyway I'm enjoying learning about it all too. Thanks again for taking the time to comment.

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  14. Be careful what you wish for. it's easy to imagine a government (probably Labour) just nationalising the lot i.e. bagging the assets and replacing them by the same sort of unfunded promise that most government employees get.

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    1. It's very true that the future is uncertain but I suspect that the 1/49th career average status that the LGPS has just shifted to is the biggest risk factor for yet more change in the medium-term future, especially if costs aren't brought down somehow.

      Thanks for commenting :-)

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  15. John Clancy has been elected leader of Birmingham City Council.

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  16. Hi Aron - I don't think I'd have picked up on that otherwise so many thanks for the info. :-)

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