Newham’s property for pensions plan delayed

A council’s plan to transfer property into a special purpose company to reduce the revenue impact of its pension fund liabilities has been delayed after councillors demanded to examine the proposals.

In July, London Borough of Newham’s cabinet agreed to release up to £500,000 to create the vehicle which would harness the council’s property portfolio to create an income stream for its pension fund.

The plan would be the first of its kind in the local authority sector, but the authority’s overview and scrutiny committee has now decided to take a closer look at the proposals.

Three councillors last week wrote to the committee requesting the call-in, saying: “We believe that this is the wrong sequencing for this decision because the proposal has not been consulted upon and agreed beforehand with the Newham Council investment and accounts committee.

“As members of this committee we are concerned that this proposal may not be in the best interests of the council nor the staff pension fund and we might waste this £500,000 if the committee decide that this proposal is not appropriate.”

They said that the proposal has “significant risks attached to it which we feel merit proper scrutiny”.

The July report which was approved by the council’s cabinet said that implementing the plan would reduce initial pension contributions, generating revenue savings over the next three years.

In the fourth year, the council would test whether the fund was better or worse off than assumed.

But the report warned: “If the position is worse than assumed then this would result in the council making rental payments over the long term for the property assets covered by this arrangement.”

An initial feasibility and cost benefit study of the proposal was completed by consultant KPMG in May, and it had been hoped to introduce the scheme for the start of the 2016/17 financial year.

The SPV model has been used widely by private sector pension funds to offset liabilities. However, Newham’s proposal, if approved, would be the first time that it has been used by a council pension fund.

Details on Newham’s proposals are sparse, but generally the model involves a sponsoring employer transferring assets into an SPV which uses them to generate an income stream for its pension fund.

The Pensions Regulator warned in 2013 that the use of such complex structures “can lead to increases in risk where advisers to schemes have not anticipated all the implications of using this structure”.

It added: “It is vital that trustees understand the risks they are taking and consider carefully whether a more complex approach to supporting the scheme, which may involve additional risk taking by the scheme, is preferable to a straightforward one.”

The cabinet report said that advice from external advisers said that the council possesses the legal powers to set up the arrangements but recommended further exploration of legal and financial implications.

Keith Webster, pensions partner at law firm CMS Cameron McKenna, said: “Such schemes usually involve granting security over the assets transferred and there may be concerns about how appropriate it is for this to happen in some cases.”

He said that straightforward SPV models could cost as little as £250,000 to put in place but Newham was likely to incur extra costs due to the fact that it has not been undertaken by a local authority before.

A spokeswoman for Newham said that the council was “not in a position to talk about” how the scheme would work, nor the scale of potential risk involved in the scheme.

The overview and scrutiny committee will take place on Monday evening and consider whether to make a recommendation to the council’s executive that no further money should be spent on the project until it has been considered by the investment and accounts committee.

Photo (cropped): Plane Stupid, Flickr,