A £24m share blunder has been made with the pension cash of tens of thousands of Teesside public sector workers.
Details of the multi-million pound error at Teesside Pension Fund have emerged in a confidential report seen by the BBC Local Democracy Service.
The costly gaffe was made in an attempt to buy shares in NewRiver REIT – the property company which owns Middlesbrough shopping mall The Hill Street Centre.
But rather than acquire the intended 130,000 shares for around £435,000 – an order for more than SEVEN MILLION shares for £24m was instead made.
The Teesside Pension Fund (TPF) looks after the retirement pots of almost 70,000 current and former local authority workers on Teesside.
It controls around £4bn of assets.
The mistake – made in June 2017 – was serious enough for auditors to identify an overall cause for concern in the fund’s risk management.
However they were satisfied the mistake was not deliberate and there was no evidence of insider trading.
Middlesbrough Council said the pension fund – and its beneficiaries – have not been adversely affected by the bungle.
The Tees Valley Audit and Assurance Service report said the mistake came to light in early July 2017.
Teesside Pension Fund already held 130,000 shares in NewRiver REIT at the time – and had intended to buy a similar amount.
The report said: “There was an over-purchase of 7,289,394, which at the event price of 335p per share came at an additional cost of approximately £24.42m to TPF.
“This unexpected cost (which appeared as though it could have been as high as £72.62m at first, as the maximum of 21,678,048 shares had been provisionally allocated) created an overdrawn position which first alerted the TPF Administration Team to the problem.”
The purchase breached the investment manager’s £5m daily share trading limit.
How did the mistake happen?
The blame for the “human error” has been put on the forms used to make share purchases.
The “Corporate Action Manager’s Response” form is used by investment managers to authorise deals.
The report says it was designed years ago when trading was simpler and based only around existing shareholdings.
It said: “Problems arise – as they did in the NewRiver REIT incident – when only the word ‘execute’ is written in an option box to denote the take up of a quantity of shares.
“The actual number of shares is not normally indicated. There is also no space on the response form, or any customary procedure, for writing the expected total financial cost to TPF of the option.”
The report recommends a review of the forms is carried out.
It also highlighted how software used by TPF allowed a tick in a box to authorise buying all remaining available stock in a company.
It said: “Perhaps manually writing the number of shares in the quantity field, rather than ticking the box, might avoid any potential erroneous maximum entitlements being instructed.”
The huge over-purchase meant TPF has become one of NewRiver REIT’s top five investors.
If a further 1.6m shares had been bought, TPF would have had to notify the London Stock Exchange that it held 3% of the company’s stock.
It now faces the prospect of gradually offloading its huge stake.
Mistake was not deliberate
NewRiver REIT and Middlesbrough Council have been involved in a partnership over the potential development of a “media village” near HillStreet Shopping Centre.
The report notes this could lead to “possible suggestions by third parties of conflicts of interest”.
But auditors said they found no evidence that the over-purchase had been deliberate or was evidence of “insider trading”.
The report said: “Mitigating factors for this incident are that there is no indication that the action was deliberate and that retrospective authorisation of the transaction was carried out in a reasonable manner.
“However, the fact that the transaction was able to occur and, given the sums involved, make it a cause for concern.”
It added: “Managers at all levels are aware of the potential for conflicts of interest, and there was no evidence of conflicts (or insider trading) in the case of the NewRiver REIT share purchase; however, continuing oversight and improved recording methods are recommended.”
Auditors recommended “major improvements” to the fund’s systems “to ensure the control environment is effective”.
What does the pension fund say?
A Middlesbrough Council spokesman said: “In June, 2017 a significant over-purchase of shares in a particular stock was made in error on behalf of the Teesside Pension Fund.
“This issue was identified internally, and the council’s strategic director for finance, governance and support used his delegated authority to ensure compliance with the Pension Fund investment strategy.
“As a result, specialist legal advice was obtained and an internal audit report was commissioned promptly.
“Findings were implemented in full, with measures put in place to prevent a similar error occurring in future.
“The issue was reported to the Pension Committee at the first opportunity in September, 2017, and the report of Internal Audit considered by both the Pension Committee and Corporate Affairs and Audit Committee in March this year.
“This was a case of human error rather than of any wrongdoing or attempt to defraud, and was identified promptly and appropriately.
“The Pension Fund – currently worth more than £4bn – and its beneficiaries were not adversely affected.”