APPG Local Government Pension Funds (and the pitfalls of infrastructure investment)

Last week I attended an evening meeting of the All Party Parliamentary Group on Local Authority Pension Funds chaired by Clive Betts MP.

Before the meeting started I had a robust but interesting exchange with a policy expert on Local Authority Housing companies. I am really worried about such investments but promised to read his paper and then meet.

At the meeting itself the guest speaker was National Infrastructure Commissioner, Julia Prescott, who gave an upbeat presentation on the many opportunities offered to LGPS pension funds by infrastructure investments. I am generally a fan of pension funds investing in in long term infrastructure projects but in the Q&A that followed, I was reminded of some of the challenges, in particular, those facing local government pension investments in this asset class.

In response to a question, Julia gave the example of funds investing in a future Silvertown tunnel in East London in a positive light when obviously she was not aware of the huge political opposition to a such a tunnel locally and the environmental risks and reputational damage that any investor in a tunnel would face, especially if a local authority pension fund.

I had to leave early for another meeting so I did not have the chance to ask a question but I suspect that the new London wide Council Pension Collective Investment Vehicle (CIV) would face enormous problems investing in such a project that many think would result in the carbon monoxide gassing of children.

"Government to respond to petition challenging LGPS investment reforms"

From Professional Pensions website. (I must send them a new picture to use!)

"More than 10,000 people have signed a parliamentary petition launched by Unison to examine proposed changes to the Local Government Pension Scheme (LGPS) investment regulations.

The union has been challenging some of the government's proposals which it is concerned could lead to ministers telling the LGPS to invest in UK infrastructure projects.

The government is keen for the LGPS to increase investment in UK infrastructure, given just 1% of the scheme's total assets is allocated to the asset class. It hopes that pooling the scheme's 89 funds will help achieve this, as well as changes to the current investment regulations that restrict how much can be invested in infrastructure.

(Further readingbelow)

• Who controls the LGPS: members or the government?
• What could an LGPS national infrastructure platform look like?

The government responds to all petitions that get more than 10,000 signatures. A debate will be considered in parliament if 100,000 people sign up.

Unison is hoping an eventual debate would put the LGPS reforms under scrutiny. "The spotlight and publicity from doing this will hopefully make the government think again," said union representative John Gray (pictured above).

"What the government is proposing is unlawful. We know what happens when people make investment decisions based on political pressures. Osborne seems to think the LGPS is some sort of British sovereign wealth fund. It is not. It is there to pay pensions."

First Actuarial partner Rob Hammond who agreed with some of Unison's points said: "It would be unhelpful if there was something so prescriptive from government as to how schemes should invest."

A consultation on the proposed changes to investment regulation ended in February, where several bodies warned they would give too much power to the government.

In the past Unison has argued the government's reform agenda contradicts European pension law. Unlike private sector schemes, the LGPS is not subject to the Institutions for Occupational Retirement Provision (IORP) as the government has used a get-out clause allowing a pension fund to be exempt from certain parts of the directive where benefits are guaranteed by the public authority.

Unison has argued for years that this exemption is wrong and that LGPS must comply with IORP. The directive says member states must not subject investment decisions of institution or manager to any prior approval or system notification".

The petition is now nearly 20,000 - sign here in under 2 minutes  https://petition.parliament.uk/petitions/125475

Council pensions, mergers and the infrastructure cacophony

(this is an article I wrote for Professional Pensions which was published yesterday on behalf of the AMNT. An earlier John's Labour Blog version is here).

"Recently Sir Merrick Cockell, Chair of the Local Government Association announced that he personally supported the merger of the 101 different Local Government Pension Schemes (LGPS) into 5 “super schemes” each worth around £30 billion each.

He was being interviewed about a report from The Future Homes Commission on the need for investment in residential property. He argued that to invest in such infrastructure you need massive scale. There are claims that this merger and investment could result in 300,000 more homes being built every year with 15% of pension assets being invested

His comments are likely to be more than a little controversial in the sedate world of Council pension funds.  Merger is controversial. Some funds have consistently argued for merger in the past not only to enable infrastructure investment but to increase returns and slash costs. Others say "rubbish", bigger doesn't mean better and small is often beautiful (and more democratic and responsive).  The fragmentation of pension funds in the private sector is also far worse.

Yet, the governance concern about these proposals is even more significant than a spat over size.

As a LGPS member nominated representative I have been in favour of looking into the merits of merging Council pensions schemes for many years. Also investing in rented residential properties as an asset class with the prospect of long term inflation linked returns has always seemed attractive.

But remember pension funds must be run in the interests of the scheme beneficiaries and not make up for an inadequate state housing policy or the need to stimulate demand in the wider economy.

Have Councils in favour or opposed to merger actually consulted beforehand on this issue with their beneficiaries? Why is the government being let off the hock and not asked for guarantees?

The local government trade unions have quite rightly objected to this plan which was made without any consultation with them.  There is a planned cap on employer contributions to the LGPS so if this infrastructure investment goes belly up then active beneficiaries will be left to pick up the pieces.

15% is a very significant amount of assets to invest in any one class. Nothing in life is risk free. There is an obvious risk of property price crashes or even that future housing benefit cuts could derail plans.  Hundreds of organisations are cited as contributing to the Future Homes report but there is no input from those whose money it is being proposed should be put at risk?

For this still worthy proposal to have any legs there needs to be firstly proper consultation with the representatives of scheme beneficiaries on why this is good for them and then the drawing up of a business plan as water tight as possible".

Update: The Government are now consulting on plans to allow Council Pensions to invest up to 30% of its assets in infrastructure? Up from the existing limit of 15%. Hello, 30%! What is going on here?

Council Pensions, Mergers & the Infrastructure Cacophony

This morning I was surprised to hear Sir Merrick Cockell, Chair of the Local Government Association (and Leader of Kensington and Chelsea) say on the Today radio programme that he (personally) supports the merger of the £150 billion Local Authority Pension Scheme (LGPS) into 5 or so funds only. There are currently 101 different and separate LGPS funds.

He was being interviewed about a report from The Future Homes Commission  about the need for investment in residential property. He argued that to invest in such infrastructure you need massive scale. There are claims that this merger and investment could result in 300,000 more homes being built every year.

His comments are likely to be more than a little controversial in our sedate world of Council pensions. I am reminded of the bun fight in City Hall here between "merger-ists" and "merger deniers" and the epic battle earlier this month here between the "Wandsworth" Council bulldog and "Gentleman Jim" LPFA.

One side argues that if the schemes merge they will be big enough to invest in such infrastructure funds that will not only provide homes, a much needed boost to the economy but also increase returns and slash costs. The other says "rubbish", bigger doesn't mean better and small is often beautiful (and more democratic and responsive).

By coincidence on Wednesday evening I went to the Parliamentary launch of the report by the Smith Institute "local authority pension funds: investing for growth".  It makes a number of recommendations but broadly supports the idea of a "clearing house" and "pooled" LGPS funds to invest in social housing and infrastructure. Local Authority Pension Fund Forum (LAPFF) Chair Ian Greenwood made it clear at the meeting that the forum was "neutral" with regard to merger of its funds.

In the Q&A I made the point that the report itself didn't appear to address any significant beneficiary concerns and a major reason why pension funds can't already invest in social housing is that property fund managers don't want anything to do with "plebs" and only want to invest in shiny new shopping centres and warehouses. Comrade Michael Johnson threw his usual hand grenade into the proceedings by stating that the LGPS is an Empire run in the interests of the Empire rather than its beneficiaries.

Following this mornings report UNISON has quite rightly reminded everyone that the absolute legal duty of pension schemes is to act in the interests of its beneficiaries (not to make property developers rich).  While I am pretty sure that this does not mean that UNISON is necessarily opposed to such investment, those who propose it need to be damn sure that these investments benefit our members.

Out of the hundreds of organisations that are cited as contributing to the Future Homes report there appears to be no input whatsoever from those whose money it is being proposed should be put at risk?

Check my twitter account @grayee for more details on the "epic battle" (10 October) and Smith report (24 October).

Lab12: One nation infrastructure in Britain

(Guest post by Cllr Gavin Pearson) Labour Party Conference saw the launch of a new ethos from Labour headlined “One Nation Labour” in Ed Miliband’s leader’s speech. Four hours later, a fringe reception held by the infrastructure industry, saw some interesting questions raised.

The World Economic Forum ranks the UK a disastrous 24th in the world for infrastructure. The British public face high and rising transport costs. We have drought warnings and flooding at the same time. Our rail franchises finance legal challenges not better trains. And we face an energy crunch.

Yet treating the UK as One Nation could solve this.

Infrastructure is what made the UK One Nation. Be it road, rail or canals, before these things were established, our clocks all read different times. Once they were built, we were as one.

But we remain divided. We may not want division between the North and the South, but economically speaking, we have it. Likewise with HS2. Rural villages declare it satanic while Birmingham welcomes business opportunities. Scotland and Wales meanwhile, look on enviously at the chance of such disagreement.

So can a One Nation spirit prove practical? It is probably too much to hope that rural areas will start welcoming wind farms in the service of their country. Many will continue to demand the lights stay on with energy produced out of their sight, far from their homes. But strategically, a plan for the nation makes sense.

A renewable future is likely to see over-generation in sparsely populated Scotland, with a grid able to carry it south to English cities. But it is also likely to see more generation and energy saving in people’s own homes and communities. Giving everyone a stake in the nation’s energy – and publishing a mapped out national strategy would be very One Nation.

Likewise we have plenty of national rainfall but no national distribution – thus vast areas face drought while others flood.

The biggest key though, remains transport. People need to move freely around their One Nation. Yet rail firms raise prices and franchises collapse in acrimony and legal costs. We break up the network and services into patches and regions instead of a cohesive nation.

At the same time our One Nation debates where around London we should build new airport capacity. But why not build a new hub airport in the North, serving Leeds, Manchester, Liverpool and Newcastle – instead of yet another London airport in the Thames that business travellers from the whole of our Islands must go to for flights to China and India?

Not that One Nation means ignoring the local. Look to Liverpool’s docks to see regeneration in practice. We can apply that to Hull. Look at London Overground’s impact at Dalston and Hackney. Let’s apply the model to West Bromwch and Bradford. One Nation should recognise its own successes and build on them for all.

So as Labour looks to a One Nation future, let’s take that ethos back to the hard-edge of nation building and bring our country together.