A proposal is underway to rescind a controversial decision to transfer residential property into Croydon’s pension fund so the cash-strapped council could pay less in employer contributions, following a “change in circumstances”.
The proposal, which will be decided on by the pension committee at its meeting on 25 May, and then by the full council, comes just months after London Borough of Croydon effectively filed for bankruptcy by issuing a Section 114 notice.
The council had promised to transfer residential property from Croydon Affordable Homes and Croydon Affordable Tenures, valued at around £104m, to the pension fund between 2057 and 2059. This would reduce its annual employer contributions by 2.5% or £3.5m from 2019/2020, based on assumed growth of the Consumer Prices Index plus 1.7% in the properties. In 2018 the council needed to find £25.9m of cost savings over four years to 2022.
According to the agenda pack for the committee's meeting, the project - which was given the go-ahead by the committee in November 2018 and by the council in January 2019 - has not moved to completion "for various technical reasons" due to the "difficulty in valuing the proposal and projecting that valuation into a future net value". Given the "change of circumstances and the effluxion of time", the report said it is now "appropriate to reconsider this approach".
The report said, firstly, the pension fund is in a much healthier position since the decision was made, with the actuarial funding level improving from 66% in 2010 to 88% in 2019, which means it should consider reducing the level of risk.
The document said: "There is a significant amount of uncertainty built into this proposal particularly in terms of future value and this uncertainty does not fall into the usual categories of risk that the fund is usually exposed to, such as that related to: interest rates; currency; liquidity; government policy; and so forth. These risks are quantifiable and comprise the fund's risk appetite. Uncertainty leads to undue risk without the reward that normally would be associated with risk."
Another issue is the "inherent operational complexity" of managing this exercise which is unique and has a time scale of 40 years, with the report adding it is unusual for a fund of this size to manage a large residential property portfolio in-house and maintain these assets as investments.
'Lack of clarity'
More is known about the risks associated with this scheme, more attention has been focused on this proposal and the technical challenges have been highlighted.
An article published by Professional Pensions in February 2019 raised concerns about the proposed transfer, with two members of Croydon's pension committee warning it would not be in their pension fund members' best interests and pointing out that 40 years is a long time in the future.
Conservative councillor Luke Clancy, who is a reserve member of the pension committee and voted against the transfer, said:
"In hindsight, the Labour council's attempt to balance its budget by reducing contributions to the pension fund was the canary in the coal mine, indicating the council was struggling to manage its finances. This odd proposal isn't in the interest of members and could have put their retirement pots at risk just so the council could shore up its expenditure. Also, a lot of taxpayers' money will have been spent on adviser and lawyer fees to advise the council, which is a huge waste."
Conservative councillor Yvette Hopley, who is a member of the pension committee and also voted against the transfer proposal, added: "All the Croydon Conservative councillors were against this transfer proposal because we didn't think it was the best option for the pension fund and its members. We have a fiduciary responsibility, but we didn't have the chance to do an evaluation of other property mandates, so we felt that the decision was a bit forced on us.
"Even though we had a lot of lawyers, there was a lack of clarity around the clear blue water that one needs to have around a pension fund in terms of security and risk. We were worried about the future impact 40 years down the line - who knows what's going to happen?"
Professional Pensions has approached Croydon Council for comment.
The Ministry of Housing, Communities and Local Government (MHCLG) and The Pensions Regulator (TPR) have both expressed interest in the approach, but no formal response has been received from either body, according to the pension committee's agenda pack.
Professional Pensions understands that the proposed property-backed funding structure was reported to TPR in the first quarter of 2019, which led to the pension scheme manager and Local Pensions Board representative being formally interviewed by TPR.
A TPR spokesperson said: "We are in discussions with the London Borough of Croydon Pension Fund regarding this matter. We do not comment in detail on specific pension schemes unless appropriate."
Last November, Croydon Council became the second council in England to issue a S114 notice, following Northamptonshire in 2018.
