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).