Below is the full version of the speech I gave this afternoon at the crowded Cabinet meeting at Newham Dockside in support of last night's recommendations by our Overview & Scrutiny Committee.
The recommendation was that we should not spend up to £500k on a SPV for the pension fund without the approval of the Pension committee. This meeting was open to the public and I believe a journalist was present.
“Thank you Mayor. John Gray, Councillor in West Ham ward. I apologise that I have not had time to properly prepare this speech but I support the recommendations of the Overview & Scrutiny Committee for the following reasons.
The first reason for further review is "Risk". This proposal appears to be, on the inadequate information I have been allowed to see so far (despite being a Councillor and member of the Investment and Accounts Committee) to be an expensive and I am advised, dangerous, gamble with residents' and pensioners' money. To be clear there are no, I repeat no budget “savings” to be made from this proposal.
It will only be at best a (welcome) deferral of Council “contributions”, which if the pension fund does well may not be needed. But if the pension fund does not perform well, then it runs the risk of plunging it into an even greater deficit over the next 20 years than the £298 million current shortfall.
The second reason is “Process”. To be clear,I bought up this item in the Pension work plan at the Committee meeting in June and was reassured that this proposal was at a very early stage and nothing would be agreed without the agreement of our committee. There was no mention of a 20 page PowerPoint presentation dated April and no mention of spending up to £500k before the pension committee had agreed to this proposal.
Some background to the issues. Newham Council is obliged by law to allow its employed and (many of its) contracted out staff to join the national local government pension scheme (LGPS). To pay for the cost of pensions, Newham and other Councils have their own local pension funds which they, other employers and staff contribute towards. Thousands of former Newham staff are already dependent upon the scheme for their pension, the majority of whom were low paid.
This money is usually invested in British and worldwide government bonds, company stocks and shares, which are intended to grow in value over the long term and pay for the pensions. The value of the Newham fund is currently around £1 billion, but it has a significant "deficit" (i.e. it is estimated that it has promised to pay out more in pensions than it will get in contributions and from investment growth).
The current deficit is £298 million. The Pension fund has been in deficit for many decades. There have been a series of plans to pay off the deficit over up to 20 year periods which have not worked and the repayment period just keeps getting extended.
It should be noted that Newham has decided to adopt a more "optimistic" valuation of the deficit than many other Councils. Other Councils employ advisors who would value our deficit as being far worse.
There are a number of reasons for the deficit but the chief one is that the Council (as have many other Councils) has consistently failed to accurately predict what are the future costs of the scheme and have therefore failed to put enough money into their funds. This means that Newham is currently paying millions of pounds per year extra to make up for the past shortfall.
The other main reason is that unlike other funded public sector schemes such as the Universities and Railways, the LGPS is split up into 101 different funds which means expensive duplication of advisers and managers and that they are far too small to achieve economies of scale to cut costs and improve performance. Size and scale matters in pensions and the Newham scheme is arguably far too small and therefore inefficient.
Past deficits are the responsibility of Newham Council tax payers while the risk from the cost of future pensions is now the responsibility of staff. If the cost of providing future pensions goes up by more than 13% then Government legislation will mean that staff pensions will have to be reduced and/or their contributions raised.
It is now clear from QC legal advice that there is no “Crown Guarantee” to the LGPS. In the unlikely but not impossible situation in these uncertain times that a Council goes bust, who will pay the pensions of our pensioners?
It is imperative to residents and staff pensioners that the recovery plan to pay off the deficit is not to be put at risk. There must be sufficient funding for the scheme and the Council must not continue to underfund it and therefore making the deficit even worse. The Council needs to invest to save.
Finally, we must make sure that managers and adviser costs are reduced and returns enhanced. Newham pension fund is being ripped off by the financial services industry and this is where we should be making savings.
The proposal itself (based on the limited information available)
·Newham currently pays £35 million per year in employer contributions to the staff pension scheme.
· It pays this because it is advised by pension experts called “actuaries” that it needs to pay this amount of money to meet its future pension promises to staff and make up for its failure to pay enough money into the scheme in the past.
· The proposal argues that Newham does not have to pay so much into the staff pension scheme because the Actuary is being too cautious about investment returns and pensioners life expectancy (being “Prudential”). If he or she was more optimistic about this then it could pay less.
· These change in assumptions could mean that the Council will only have to pay £30 million per year instead of £35 million. Therefore “saving” £5 million per year and £15 million over 3 years. Note this is “revenue” and not “real savings”.
· To “safeguard” the Pension fund it will be given a Council owned asset, such as a property or group of properties (for example only the Morrison’s shopping centre in Stratford) as security against the “Prudential” assumptions being right after all. Rents from the asset would then be paid into the pension fund. It is unclear but in theory the building could also be sold by the pension fund to make up the difference.
· The presentation on the Newham website makes it clear that after 3 years the proposal will have to be revalued and if the assumptions made are wrong, then the Council will have to pay an extra £20 million in contributions to the scheme over the next 20 years to make up for this new shortfall. This is on top of the massive deficit/shortfall they are already funding.
· It is of concern that the Newham Council Executive continually stress that they make prudential decisions regarding Council borrowing over the Olympic stadium and Red Doors but don’t want to make prudential assumptions regarding pension investments.
· On the information so far it seems to at best that this is a clever (but expensive) speculative punt to reduce staff pension contributions over the next few years by gambling that the actuaries were just being overcautious and we didn’t need to put that amount of money aside in any case. However, at worse it will make the scheme far more expensive and the deficit even bigger. This needs further investigation by the pension committee.
I finished by asking that the Mayor agrees to let Newham Pension Committee, whose responsibility it will be is to approve the final proposal to agree that they are indeed minded to scope it out before any public money is spent on it - and possibly wasted if we don't agree to the proposal".
There was some further debate at Cabinet and I understand that the Mayor decided to not follow the recommendations of Overview & Scrutiny and that public money will be spent on the developing the SPV.
I am preparing a series of questions to be submitted to our treasury officers and our actuaries which I will post in next day or two once they are submitted.