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Councils Dip Into Pension Fund Savings

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http://www.guardian.co.uk/business/2009/ju...pension-schemes

Local authorities across Britain are believed to be borrowing hundreds of millions of pounds from staff pension schemes in order to boost returns on their own cash deposits - without sharing the full interest with the pension fund.

Unions want this investment practice, which is outlawed in the private sector, to be banned immediately. They have suggested that councils' investment strategies may already be illegal.

The Local Government Association insisted that councils were acting within the regulations. "The law requires councils to invest their pension fund money properly and prudently, and that is what they do," it said.

The controversy highlights potential conflicts of interest among council finance officers, many of whom are responsible for pension investments as well as for the general council funds used to finance day-to-day services.

Councils are allowed to invest 10% of their pension fund money and have typically elected to put the borrowed cash in high-interest accounts. In return, the pension funds receive a highly uncompetitive interest rate, based on seven-day Libor (inter-bank rates).

Critics of the scheme have been quick to see echoes of the Robert Maxwell scandal, when the publisher used more than £300m of Mirror Group pension money to subsidise his business empire.

Lord Oakeshott, the Liberal Democrat pension spokesman, said councils were acting irresponsibly and in breach of basic governance principles.

"Why should public pension funds have inferior corporate governance standards and protection from conflicts of interest than private funds? Councils playing this game are on a slippery slope that ended with Bob Maxwell mixing pension fund cash with his own. They should stop it now, for good," he said.

Colin Meech, the national officer of the public service union Unison, said: "The government has been negligent and has not observed UK pension fund law, principally the Occupational Pension Scheme (Investment) Regulations 2005, which disbar employers from borrowing from their staff retirement funds. According to legal advice obtained by the union, this is a potentially criminal act."

Local government investment decisions have faced unprecedented scrutiny in the wake of the Icelandic banking crisis. About £1bn of local authority cash has been trapped in three failed banks: Kaupthing, Landsbanki and Glitnir.

Freedom of information requests by the local authority journal The MJ discovered that, in several cases, a good proportion of deposits were drawn from the Local Government Pension Scheme.

Most local government pension schemes have suffered large falls in value over the past two years, which will only be made worse by part of their investments being channelled into low-interest bank deposit accounts.

Excellent.

This couldn't possible go wrong could it.

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Does this mean some fat council official will not be found floating face down in the River Mersey?

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Oh for Gods sake don't these people have any sense of their responsibility the members of the pension trust?

Don't answer that.

Actually I think this strategy is completely legitimate.

The Local Authority Pension schemes were almost fully funded a few years back and now because of the market downturn they are not quite so healthy. The trouble is that these schemes have consequently been bailed out by the tax payer year on year for the last few years - which essentially is the Council officers stealing from the Council Taxpayer.

Now that the council has got in such bad financial straights, surely it is right that the money stolen from the Taxpayer should be returned to make up the shortfall in services and keep council tax bills low.

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Following the Injinian state collapse theory, its a rational move for the state officials to raid the pension funds in order to keep the game going longer than otherwise.

The otherwise would be much larger council layoffs which would contribute to the deflationary death spiral.

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surely it is right that the money stolen from the Taxpayer should be returned to make up the shortfall in services and keep council tax bills low.

Particularly if you believe that tax payers should bear the open-ended liability for future shortfalls, too.

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Following the Injinian state collapse theory, its a rational move for the state officials to raid the pension funds in order to keep the game going longer than otherwise.

The otherwise would be much larger council layoffs which would contribute to the deflationary death spiral.

But is this going to leave the taxpayer with an even bigger unfunded shortfall in the future?

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But is this going to leave the taxpayer with an even bigger unfunded shortfall in the future?

What taxpayer?

Systemic failure.

I'll go with Injin on this. It's been in the pipeline post-war.

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I work as an advisor to Local Govt Pension Schemes (as well as Private sector Pension Schemes). As such, I believe that this article has taken things completely out of context.

In short, funded LGPS are required to diversify their assets in a responsible manner. Part of that diversification includes cash deposits (availble to pay pensions and lump sums payable in the short/medium term). Given that returns in deposit accounts are pathetic, why not invest in something which is (essentially) 100% guaranteed, but which provides greater returns.

Councils do not have access to the cash directly on a piecemeal basis, rather they need to set out a project that the cash will be used for and the returns that they will pay back to the Scheme in return. For example, Council A wish to build a new bridge over the river, but don't have the funds available. They approach the Scheme and offer to give a return of 8%, payable within 12mths.

The Council get their money, the Scheme achieve a default free high return. As part of this contract, the cash is loaned on a secured basis - say against a plot of land which the council owns.

Oh, and the Scheme's regularly turn down projects, where the timeframe, or the returns are not acceptable.

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The Council get their money, the Scheme achieve a default free high return. As part of this contract, the cash is loaned on a secured basis - say against a plot of land which the council owns.

Council secures on 1 plot, no planning permission, worth lets say 1M. land values are generally going in which direction at the moment? Solution: Land magically gets residential planning permission, value goes up. ;)

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Council secures on 1 plot, no planning permission, worth lets say 1M. land values are generally going in which direction at the moment? Solution: Land magically gets residential planning permission, value goes up. ;)

Before agreeing to any contract, they are required to carry out due diligence, as per any appointment of a fund manager. As such, you would expect/hope that they would be aware of any issues with regards to planning permission. That said, this is public sector, so it tends to take a long time to get anything done.

To be fair, most of the contracts I've seen tend to involve council buildings as the secured element.

Another way of looking at this 'investment' is as a govt bond (with far higher yields). For example, build a toll road, 50% of returns over next 20 years are payable to the Scheme. The officers of the Scheme are savvy enough to realise that a minimum real return is required, so make sure and favour the terms in their favour (CPI + X% p.a). Bear in mind, these guys don't want to lose their 'gold-plated' pension, so aren't going to be (too) silly.

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