Former Birmingham City Council leader demands £547m pensions ‘refund'

Former Birmingham City Council leader John Clancy is demanding an urgent review into the running of the West Midlands Pension Fund amid claims the broke council has 'overpaid' it by over half a billion pounds - and ought to get its money back.

Now a visiting professor, John Clancy is calling for a refund and urgent government intervention. In a series of extraordinary blogs about the issue, Prof Clancy and fellow academic Prof David Bailey allege the council's financial woes are linked to excessive 'optional' contributions and high management fees it has paid to the fund.

He claims that as a result the city council is currently £547 million out of pocket, while the cash-rich pension fund is sitting on a huge surplus it doesn't need. He also claims the fund's management fees are excessive, particularly when compared to similar sized funds.

READ MORE: Retired mum claims she's fallen into debt after West Midlands Pension Fund delays

He is calling on deputy prime minister Angela Rayner to use her powers overseeing pension funds to order a refund - with Prof Clancy claiming doing so could wipe out the city council's debts in one go. He has demanded an urgent review of the fund’s affairs and is backed by some pensioners who pay into it.

The fund also continues to come under fire for its failure to sort out 'teething problems' with a new digital system which has triggered a massive backlog of cases for the last 18 months. It's affected payouts to thousands of pensioners, with some left struggling for months without pensions they are entitled to.

The West Midlands Pension Fund provides pension services for around 340,000 members and employees of seven local councils in Birmingham, Sandwell, Dudley, Solihull, Walsall, Wolverhampton and Coventry, along with the WMCA, and hundreds of other public sector businesses and organisations. It is the second largest in England and Wales with over £21 billion of assets. Over £7.3 billion of these are invested in UK infrastructure, private equity and property.

In a report for Birmingham City University’s Centre for Brexit Studies, Prof Clancy and Prof Bailey make a series of allegations about the way the fund operates. In a subsequent BirminghamLive interview, Prof Clancy says his fears that the fund was 'over billing' were confirmed by the fund's recently published annual accounts which showed a £1.5 billion surplus.

"A pension fund guaranteed by covenant like this is has no need to be running at a massive surplus. They are strongly covenanted, with the Government standing behind them. If anything it should operate at 85-90% of its total liability, because it would never need to pay out 100% of pensioners at a single time."

He said when he was leader of the city council - Prof Clancy was ousted in 2017 over his role and actions at the end of a protracted bin strike - he challenged the level of additional contributions and management fees demanded of the city council by the fund managers, and managed to negotiate, with council officers, a much lower sum. However, he says since he left the contribution levels and management fees paid have gone up significantly, particularly when compared to other contributors and other funds.

"To be honest, not many councillors understand the ins and outs of pension funds, while I had a special interest in the issue," said Prof Clancy, now living in north Wales. "It is a dry issue and difficult sometimes to understand, so it attracts little attention. But people need to understand this could be critical."

He described the payment of a billion pounds in management fees to the fund in a decade as 'obscene' and said it should be run in-house, like a comparable-sized scheme for West Yorkshire which is managed internally by Bradford Council. "Their fees are a tenth of the West Midlands' fees," he said.

He also questioned the role played by, and independence of, the fund's external auditors Grant Thornton, who are also the auditors for the city council. "I don't think that should happen - there would appear to be a conflict of interest." Approached to discuss the pension fund issue, Mark Stocks, external auditor for Grant Thornton at Birmingham City Council, referred us to the fund itself for a response.

The maths behind the claims

According to Bailey and Clancy, a 2% so-called 'discount rate' was used to calculate the fund's growth over time, and assess what contributions were required to keep the fund solvent. This was a corporate bond rate. They describe it as a 'ridiculously low figure'. Over the last 25 years, the actual rate they should have used was, on average, about 6%.

Using the discount rate suggested the fund was in a big deficit, and so top up contributions were demanded to keep it solvent. In Birmingham's case, over several years, this top up amounted to around £1.2 billion. They say this was excessive, even when compared to other councils in the fund and other large cities elsewhere. In 2022, for example, it was asked to pay a 37% contribution - while other 'core cities' were paying in 18%.

The original discount rate 'miscalculation' and the demand for more contributions lies behind the 'overpayment' claim, explained Clancy. "It was literally an extraordinary ask. Birmingham City Council was the only one of the 10 Core City Councils in the UK required to pay so much in percentage terms on top of its basic total pay bill. None of the others came anywhere near it," he said. "Birmingham City Council caved in (while negotiating the fee) and paid the bill...again and again, seemingly without question. They shouldn’t have.

"And that was the iceberg which ended up sinking Birmingham City Council in 2023. Everything else is a distraction," he claimed.

All of the contributor councils, including Birmingham, also paid towards 'excessive' management fees, says Clancy. He illustrates his point with a graph showing that Wolverhampton Council contributed between £67m and £128m a year from 2015 to 2024 in fund fees, while a comparable sized council, Bradford, contributed between £7m and £15m to its similarly sized pension fund.

According to the most recent annual accounts of the pension fund, it is in surplus of over £1.5 billion (end of March 2024). According to the academics, based on a breakdown of contributing councils, Birmingham City Council owns 27% of that surplus - or £417 million. They say the council should now be given that sum back as a starting point - and doing so would help wipe out at least some of its debts, or pay off its equal pay liability, with millions to spare.

What should happen next?

Clancy and Bailey call on all of Birmingham’s MPs and the combined authority mayor Richard Parker to demand an emergency meeting with the Deputy Prime Minister, Angela Rayner, who is ultimately responsible for the conduct and dealings of all 88 or so local government pension schemes and urge her intervention.

Actions should include halting the city council's current budgeting process for next year until the situation is investigated, they say. They also say the council should consider whether to continue to invest in the West Midlands Pension Fund and consider alternatives.

They recommend the West Yorkshire Pension Fund, currently administered by Bradford City Council, because they claim it is delivered 'in house', is high performing and has much lower management fees. They go so far as to demand that the commissioners sent in to oversee the council's affairs should be recalled and dismissed because of the pension fund issue going 'unnoticed' on their watch.

They also say the council's audit committee should be given free rein to conduct a probe into the affair, while the auditors for the funds and the councils involved should be 'summoned' to answer questions.

What does West Midlands Pension Fund say?

In a lengthy response, the fund’s administrators say they were not given the opportunity to contribute to the reports prior to publication and say that they are 'fully compliant' with regulations and standards set by the Government. "The fund takes a robust and transparent approach to ensuring its fiduciary duties and the provision of pension benefits to all its members in a cost-effective manner."

They say the contributions required of each employer are set every three years 'in line with the statutory actuarial valuation.' The funding strategy is also set 'in consultation with its employers and based on the professional advice received from its appointed actuary, risk and covenant advisers'.

It says that 'individual employer circumstances are considered in the setting and review of contribution rates' and it is 'not reasonable' for all to pay the same rate. "There can be many reasons for a different level of contributions related to the history and profile of that employer, which could date back over many decades."

They add: "The figures published in financial accounts reflect an assessment for accounting purposes, based on prescribed international accounting standards. Assumptions (including discount rates) set for these are determined by the relevant employer and reviewed by their external auditors for reasonableness. The fund is scrutinised and compared to other funds nationally as part of the Government Actuary Department’s “Section 13” review. The latest review, undertaken based upon the 31 March 2022 valuations, confirmed the fund’s funding plan as being appropriate with a positive indicator of long-term cost efficiency."

They added that the fund is in 'active dialogue' with Birmingham City Council, and other participating employers, around the evolving funding position, economic environment and outlook for the next triennial actuarial valuation (due 31 March 2025).

They say that comparing one fund's investment management fees with another fund could be misleading because a more 'in depth review (is needed) to account for the different ways the fees are reported, and that its fees are independently benchmarked globally and 'compares favourably with a low-cost relative to asset value.'

Addressing the on-going concerns over delayed payouts to members, the Fund said: "We recognise that some of our service standards are still below those we, and our customers, expect. We remain extremely sorry for the delays many members have experienced in receiving benefit quotes or receiving new pension payments."

We also approached Birmingham City Council, which said its officials were still looking at the concerns raised in the blogs and would consider a future response.