Are Council pension funds being ripped off? File on 4

On Tuesday evening (and repeated 5pm today) the excellent investigative Radio 4 programme "File on 4" examined whether at the same time that Councils are suffering from massive Government cuts - their pension funds are also being ripped off by fund managers in excessive fees and charges.

There was an interesting consensus of views that they are indeed being ripped off. On the one hand former policy adviser to David Cameron, Michael Johnson, argued that 101 fragmented and inefficient Council funds running the same pension scheme was a "national embarrassment". While from the opposite political corner, UNISON national Officer, Colin Meech, compared the scheme to a bucket full of leaks and holes which constantly needs topping up.

The programme needs to be congratulated for pointing out that contrary to the tabloid stereotype the majority of people in the Council pension scheme, are not the so-called "Town Hall fat cats", but low paid, part-time women. Also unless the scheme becomes more efficient in the future then these low paid workers will pay the price with reduced pension benefits or higher contributions.

My fellow UNISON pension representative, Malcolm Cantello, described how the charging structure is so complex that no-one seems to know how much his pension fund actually pays out. Birmingham Councillor, John Clancy, believes that merged regional "super funds" would not only cut costs but enable them to have the scale to invest in much needed infrastructure projects.

The researcher, Dr Chris Seir, thinks that the actual cost of the Council pension scheme could be more than double, as previously thought, at around £1 billion per year.  Imagine what better use hard pressed Councils could do with that sort of money?

Probably the most controversial statement made (out of many) was a remark by Michael Johnson that suggested the reason why the current government had kicked the question of cutting costs and merging Council pension funds into the long grass was because the fund management industry funds the Conservative Party. I suspect that Michael is now completely off his former boss' Christmas card list.

(picture of annual Gala dinner of National Association Pension Funds inside Liverpool Cathedral paid for by City sponsors. You can download the File on 4 programme here and check out this post from last year on "how we pay for the City")

"Holding your Board to Account" fringe NAPF 2014

I am still catching up on posts about the NAPF (National Association Pension Funds) annual conference earlier this month.

This fringe was one of the better ones. Governance manager, Ashley Hamilton, from Royal London Asset Management (RLAM) spoke about how investors should hold company boards to account and what lessons should we learn from past corporate scandals.

I knew Ashley when she use to work for Pension governance consultants PIRC.  RLAM is part of Royal London which is the UK's largest mutually owned insurance company.

Ashley explained that companies are starting to recognise that investors see good governance as a a means to add value. In Japan it is also seen as a market advantage. Such standards help protect the integrity of the London market and stop certain international companies listing here.

Many investors are "passive". This means they are exposed to all companies in an index. Poor governance does have financial consequences.  For example Olympus's unlawful "kickbacks" and Newscorp, which lost $7 billion in market value in 4 days after the phone hacking scandal was exposed.

Reporting and transparency is not a means to an end.  Need to also look at corporate culture and leadership.

Tesco ticked all of the boxes of standard corporate governance. So what went wrong? the Board lost touch with customers and suppliers. It is now sending executive back to the shop floor.

Barclay's Bank also ticked all the boxes and complied with codes. Lord Turner thought it's problems were a due to a pattern of behaviour, complex structures and aggressive regulatory approaches. There needs to be cultural reform. A recognition that making excess profits at the expense of stakeholders or customers is wrong and self defeating.

Investors should be aware and look out for "Governance hot spots".  Such as a dominant or aggressive CEO who does not welcome debate or discussions: when there is no real "succession plan"; ask does the Chair of the remuneration committee really understand what and why they pay Executives or do they just leave it to the consultants to explain? 

Does the organisation have diverse pools of talent? Good governance is an indicator of risks and of opportunity. Governance is an art not a science.

RLAM vote all UK shares in Annual General meetings and if against or abstain, they will write to companies and explain why. They will take part in collective engagement and as a last resort will make a public statement.  Engagement is best pre-crisis, not post.

Her fund manager colleagues at RLAM recently thanked Ashley for her report on poor practises at the troubled retailer, Sports Direct. They took notice of her concerns and sold out of the company which then went on to lose 20% of its value.

There are of course limits of engagement. An index fund will have to hold shares in companies with bad practises; there is a "free rider problem" and absentee proxy votes still swamp AGMs.  There is also concentration of company AGMs in April and May which means there is time and resource constraints.

Corporate governance is important but not a panacea. Cultural problems are more serious than non-compliance. Trustees should be asking questions of fund managers and consultants. Actively vote your shares and facilitate information flows.

I asked Ashley the question was there empirical proof that companies that are held to account produce superior long term returns?

Ashley responded by saying that there is not that clear data but there is plenty of evidence of what happens when things go wrong.

Gregg McClymont MP at NAPF Conference 2014

Labour Shadow Pension Minister Gregg McClymont spoke (with a smile) about the previous speaker Bob Geldof being his "warm up act" this year. 

Gregg has now been coming to the NAPF Conference as Shadow minister for the last 4 years.

He has four key points.

1. There has been successful pension changes and measures which have been delivered with consensus.
2. We all need to deliver on pension promises
3. The Government is currently in the wrong place
4. It may have made decisive policy but not with the necessary checks and balances

His thoughts on these points

1. The new universal flat rate state pension and the successful launch of two million people into auto enrolment  was achieved by consensus.
2. The Government under pressure from the Labour Party and the NAPF have introduced a charge cap and the "disclosure" of transaction costs.

3. Where the Government is in a wrong place, is in the governance of pensions schemes. Where there are not independent trustees, workers are unlikely to see value for money in workplace pensions. Pensions of all types including contract schemes should be governed by independent trustees with an obligation to act in their best interests.

4. Soon many workers will be able to take out all their pensions in a lump sum (after paying a possible massive tax) but what will the guidance look like to stop people being ripped off and the likely take up by individuals is just not known.

Labour priorities are for value for money and to get this we also need to promote the scale of pension funds.  Larger pension schemes are more likely to delivery value for money.

In the Q&A I asked Greg would he agree that independent trusteeship of all pension schemes is also about re-establishing trust in the industry after decades of financial scandals.  People would save more if they were more confident that their money was being looked after by genuine beneficiaries trustees who will be acting on their behalf and making sure they are not being ripped off .

Greg thought that greater trusteeship would help establish checks and balances which is especially important since millions of people have been auto enrolled by the state and there is even a greater  responsibility to make sure the money is looked after properly.

Bob Geldof opens NAPF Conference 2014: Make a difference

Last week I went for the first time to the National Association of Pension Funds (NAPF) Annual conference in Liverpool. 

The opening speaker was someone who was pretty influential in my teenage years for his music and who later became a respected world figure for doing more than anyone else to feed millions of starving people in Africa, Sir Bob Geldof. 

To honest, I was just a little sceptical beforehand about how much an ageing rock star had to offer the British pension fund industry, but I was and I think others present, were pleasantly surprised.

He started by saying that "...after 40 years in rock and roll I end up talking to a bunch of pension geeks!"

He was a little rambling at times, talked about the risk of international war and Putin Russian adventurism, but also gave a convincing argument about how Africa is the home of some of the world's fastest growing economies.  Also that there is a business case for pension funds to invest in Africa, not for charity but as long term investors seeking returns.

Interesting start to an interesting conference, on which I will post more later. 

NAPF Local Government Conference 2013

On 21st May I attend the National Association of Pension Funds (NAPF) Local Government Conference. The keynote speaker was the Minister for Local Authorities, Brandon Lewis MP.

Now I know many people think pensions is boring but there are 4.6 million people in the UK who are members of a Council pension scheme. Collectively they are all worth around £150 billion and if combined would be the 5th biggest fund in the world. 

The minister announced a "root & branch review" of Council pension schemes (LGPS) including possible merger of the current 99 separate funds. He said "things will change but nothing ruled in or out" at this stage.

In the Q&A I asked him what is the main driver for merger-  is it to save money or is it to save the economy through infrastructure investment?  He suggested that the LGPS is bigger than the Canadian public pensions schemes but does not have their scale and efficiencies (answer - main driver is to save money - but I am not convinced this is the reason)

Next we had "Implementing the LGPS 2014: from here to go-live".  First was Chris Megainey, a senior civil servant from the Communities and Local Government department (who was described as the"new Terry Crossley"). His big news was that the new governance arrangements for the LGPS would not be in place before 2015. Rodney Barton from West Yorks Pensions scheme spoke about the huge threat to schemes from the complex career average administration arrangements.

Brian Strutton from the GMB reported on the LGPS Workstream 2 "governance & cost structure" and the problems of trying to convince the HM Treasury that there is a difference between a funded and unfunded public sector pensions scheme (NB £150 billion of assets methinks!). There appears to be some sort of classic "fudge" agreed with different valuations being allowed.

My question to panel was while it is important to get the details right, LGPS 2014 and auto enrolment means there is a massive opportunity to increase membership into the scheme but this will need local and national campaigns. (answer from Chris that there is no national money available so will have to be local).

I then went to the "All Change: Employer security & the new LGPS" workshop. Schemes face grave problems if admitted body employers go bust without adequate security and also these employers face often massive termination debts when the last employee retires. I asked the question that to avoid these debts should employers apply to open schemes to new entrants? Especially since the LGPS 2014 has radically changed due to cost sharing? (answer from panel that some employers have indeed done this just to avoid existing debt. But this is a cynical response? Well, cynical or not it makes sense to me!)

Back to the main conference room for "The 2013 Valuation: Health Check Results" to hear Ronnie Robertson from Hymans Robertson. The 2013 valuation is likely to be the 3rd "bad" funding vaulation outcome in a row. Employers such as housing associations will find it "very scary".  He quotes Michael Johnson who describes underfunded pension schemes as being in a "death spiral".  The interest on deficits & less assets means the fund eats itself.  My question was is the real problem the way we measure liability? investments are up but liabilities are much, much higher. Gilt yields are at a 200 year low? Yet it drives the entire investment philosophy? (answer was yes but no but)

Next workshop was "Responsible Investment: what it means for the LGPS?" NAPF used this to launch a new report on RI here.  Dr. Craig Mackenzie from Scottish Widows pointed out how much things had changed since in past there use to be argument about whether RI was even legal for pensions to consider. My question is there hard data available that can show pension committees that RI not about hugging trees but delivers superior returns? (answer: Yes, lots of it)

The last business item of the day was to be a bun fight debate on LGPS merger. However it turned out to be a bit of a let down.  Edmund Truell from London Pension Fund Authority (for merger - and general world domination) and Nicola Mark from Norfolk Pension Fund (against merger) were too polite and reasonable for a great debate.

Edmund argued that in London alone they could save £120-200 million per year from merger and unless we do so we are essentially all doomed. Nicola counted that all new local government ministers firstly ask why can't we merge the LGPS? -  then they ask "how can we get our hands on this money". She pointed out that if there is a 1% change in the Norfolk £2.5 billion scheme investments there is a £25 million difference. If there is a 1% change interest rates its impact is £480 million

My question to both was if pension funds are supposed to act in the interests of beneficiaries and with LGPS 2014 there will be risk sharing with employees, what consultation have you done with beneficiaries on whether merger is a good thing or not? (from the rather wafflery answers clearly neither have done any such consultation. Which I knew already since I have members of my trade union branch in both schemes. So why do they think they can speak on their behalf?)

The guest speaker at the dinner event was former adviser to prime minister Tony Blair, Alastair Campbell. Who gave a typically entertaining and provocative speech. For once I did not ask any questions.

I missed the next day's session since I had to go to a Pension Trustee meeting.

Lab12: Workplace pension fringe

This fringe by NAPF/Smith Institute was on Monday. Gregg McClymont MP, pension shadow minister is speaking. Monday (1 October) was of course the day that Workplace Pensions began. So it was pension wise, a special and even historic day.

The Labour position outlined by Gregg is encouraging. He wants full transparency on charges. He wants to encourage scale. There are nearly 50k pension schemes in the UK. Pensions should not be a "cottage industry".  Policy now is for member Trustees for all pension funds (including those run by insurance companies) and changes in fiduciary duties.

NAPF CEO Joanne Segars spoke next about how it is interesting that pensions are being reported for the first time in a largely positive way. By Christmas 500k extra people will be saving for their pensions. Their research is that 2/3rd of people will not opt out. She agreed with Gregg about scale and also the need to have a better alignment of interests between savers and pension providers.

 

My question was that one of the reasons why there has been a low take up of pensions so far is that people are not stupid, they realise that the products currently offered are often pretty rubbish and that they do not want to take all the defined contribution (DC) investment risk.  I wondered if the new look Local Government Pension Scheme 2014 could not be a model for a rebirth of sustainable and affordable defined benefit schemes in the private sector?

 

Gregg thought the idea was interesting while Joanne reminded everyone that many defined benefit schemes were in serious difficulties.

 

This was the first of four pension fringes I attended this conference. One was under Chatham House rules so I can't post on it which is a great shame but I will do the others (eventually).

National Association of Pension Funds Local Authority Conference 2012

This was very informative and well organised conference taking place during an absolutely crucial time for the future of the local government pensions scheme (LGPS). I was there as a Councillor and member of the Borough LGPS Investment and Accounts committee.

I did “twitter” (in my case a very apt term?) during the conference (see hash tag @grayee and #napf).
The NAPF had amongst many other speakers the minster responsible for the LGPS, Bob Neill MP, the Deputy Governor of the Bank of England, Charlie Bean; the Chair of the Local Government Association, Sir Merrick Cockell (who in a Q&A I referred to as “Michael”) and from the unions, GMB national secretary Brian Strutton.

The Chair of the NAPF is Joanne Segers. By coincidence the first ever trade union pension course I ever went on was delivered by her father, TUC tutor Terry Segers. Proper old school ex-fire brigade union.

Considering the number of forthright and opinionated individuals present at the conference, the Q&A sessions were quite quiet, which gave a opportunity to a certain gobby part time politician and union rep to somewhat hog the floor during questions.

Key issues to me from the speeches and seminars were:- how Housing associations are “gagging to build new homes” which if happened could help us get out of recession like it did in 1930’s; the real problem in pensions is not in the public sector but that private sector pensions were destroyed by various incompetents; if you truly want diversity on company boards why not have employee reps on them? Are fund advisers really interested in good governance and making company boards accountable? It’s a “no brainer that LGPS should share services" (if so why not just merge?); in the current LGPS if you earn £150k per year you pay less in percentage terms net than if you earn £15k pa (this is wrong, wrong, wrong); What is the collective term for Actuaries? Answer “An invoice”; the new proposed £2 billion infrastructure fund and LGPS governance (a possible national Local Government Pensions Board?)

There was clearly an expectation by speakers that the future of the LGPS negotiations would have been finalised by now. But there is some last minute hic-cups. This is immensely frustrating but I suppose they do want to make sure, as far as possible, that there is no misunderstanding or ambiguities about the “agreement”. The ultra left trade union cry babies (the so called 0.8%ers) are of course still weeping tears at the prospect of no more strike chasing to bring about the revolution but we should have the final offer very soon.

It was good to see at the final session that the conference applauded DCLG pensions lead, Terry Crossley, who is retiring from the civil service. I have crossed swords (politely) with Terry for the past 10 years or so over beneficiary representation on the LGPS. I wish him well in his retirement and told him that if a deal is reached on a new look LGPS then he should have a new part time job and go out and sell the model to the private sector who are in desperate need of affordable and sustainable defined benefit pension schemes. 

“Why should my pension scheme fund the Tories?"

Good question. Ever since it came out in Labour & Capital” blog, that the fund managers Fidelity have recently given the Conservative Party £415,000; I have been contacted by furious UNISON members whose pension fund employ Fidelity.

Local Government Pension scheme members currently have little or no influence over who is employed to manage their pension contributions (their “deferred pay”). Now they find that their pension money is being used to enrich the Tories without them even being made aware.

Many UNISON members also work for Conservative controlled Councils and are obviously concerned that these Councils are paying huge amounts of money to a company which is a significant Conservative Party funder without any disclosure or consultation. LGPS Pension fund managers usually charge annual fees of hundred of thousands of pounds to manage Council funds.

I know that a number of Labour Party councillors are also livid that they have employed such a company without being aware of this potential conflict of interest.

The author of Labour & Capital, Tom P and his wife, has a ISA with Fidelity and has been trying for sometime to get proper response from Fidelity about why they pay the Tories, will they continue to do so and why don’t they disclose their political bias? He has been pretty much been fobbed off. See the latest rather pointless response.

Following the complaints I have received from UNISON members, I have (finally) drafted a letter to Fidelity which I will consult beforehand with the London and the National UNISON Capital Stewardship forums (I currently chair both).

I hope that the National Association of Pension Funds (NAPF) will also get their finger out and give some definitive advice on donations to political Parties. At the moment their advice is only that they would not normally support such donations. What on earth does that mean in practice? No doubt at this rate we will have to wait for some typically British financial scandal to occur before “the powers to be” get their act together and ban this frankly odious practice.