Nick Vickers on fighting hedge funds, grasping the nettle & pension fund reform

Nick Vickers is a Man of Kent who joined Kent County Council in 1983. Since then Nick has undertaken a wide range of different posts in the finance function including, since 1997, the responsibility for the day-to-day management of the £3bn Kent County Council Superannuation Fund. As well as his KCC responsibilities Nick is also Chief Financial Officer of Swale Borough Council on a part time secondment arrangement. 

Room151: Nick, tell us about your role in recovering Iocal authority assets from Icelandic banks…

Nick Vickers: As soon as we realised there were 120 local authorities involved, with the help of Stephen Jones from the LGA, who has been massively influential since the beginning, local authorities got themselves organised into an overall steering committee and separate steering committees for the four Icelandic banks where deposits were lost. The one I’ve never had any involvement with is KSF. Of the other three, I’m one of two local authority reps working on the Heritable creditors committee and we act as a sounding board for the administrator, Ernst & Young – I think that’s been an incredibly well managed administration. On Landsbanki and Glitnir we were invited to join the informal creditors committee who work with the people managing the run-off of the two banks. We were there to help the administration process, provide input in the court cases and ultimately to try and establish our senior creditor status.

R151: There was a lot more coverage about you losing the money than about you getting it back…

NV: Sure, but that’s just life. In a way we really didn’t care about the press coverage, all that mattered was getting the money back and the forecast is 100% on Glitnir and a tad under 100% on Landsbanki. It is going to take time but that’s the only bit that matters to us. If we hadn’t got preferred creditor status we would have had to provide in the accounts for a much reduced level for next April and given the financial position of councils that would have been disastrous.

R151: And was it touch and go at any point?

NV: Oh, it’s been touch and go, absolutely. Although we’ve never doubted the status of our deposits or that the Icelandic law was valid, at the end of the day it doesn’t matter what we think – it matters what the court thinks. And that’s been a very, very hard fight against massive hedge funds and major international banks to get that outcome. And all credit to the Icelanders who stuck to their guns and found in our favour.

R151: And what’s the latest from the winding up boards?

NV: We had the first part of a very substantial dividend paid in December from Landsbanki and we’re hopeful the rest (of that dividend) will be paid in the next two weeks and we’ve got a meeting at the end of this month in Iceland about the full payment of all monies outstanding from Glitnir. That’s a very important meeting; the other creditors can’t object to the fact that we’re preferred creditors but they can object to all sorts of minor things around how we get paid. That’s just the nature of the Icelandic legal process and we have to accept that. But Stephen (Jones) and I will be up in Iceland again trying to protect the interests of local authorities.

R151: How has the whole Icelandic experience impacted your treasury investment strategy?

NV: We had a very diversified strategy and also a lot of pension fund cash to manage at the time for various reasons so we were banking with 32 different, highly-rated financial institutions, primarily in the UK but some oversees too: Canadian banks, Australian banks, Irish banks (for example). None of that was done on a whim – it was all done for good reasons and in a very considered way but of course none of that is ever going to look the same. We’ve got criteria which are very clear now, not just about credit ratings but about other financial information like credit derivatives and about banks which are, to use the Arlingclose expression, of ‘systemic importance’ to the UK economy. One of our local councils has money with a very highly rated Swedish bank but if that bank ran into trouble, how you explain that to members and the public just isn’t somewhere we want to go. So we’re only using very highly rated UK institutions. Also, after October 2008 we went over to Arlingclose who do genuinely provide advice – they’re not just an information service.

So those are some of the measures we’ve taken. I think generally, directors of finance, in those years leading up to 2008 were under huge pressure to contribute towards easing the burden on council tax and enabling savings elsewhere. We’ve moved into such a different world now. Of course we need to try and get more out of treasury but treasury isn’t going to solve the problems which require fundamental reduction in expenditure. We’re in a period of unbelievable risk in financial markets and the whole focus is on security and liquidity.

R151: Do you think the rhetoric of security and liquidity is matched by what councils are doing with their money?

NV: I think a lot depends on your history and if you haven’t been through the Iceland episode you’ve probably got no conception of that it’s like to go through it. I know of a council who are still using building societies as counterparties. The building society sector went through a very difficult time and you could argue that the Government might let a small building society go to the wall. It probably wouldn’t but it creates all of those questions again and we’re sticking to banking with counterparties we believe are systemically important and there’s going to be absolutely no movement on that.

R151: As someone who manages the financial affairs of two councils (Kent and Swale) have you seen benefits in the cost of procuring financial services?

NV: I think the main benefit that has come to Swale from its relationship with Kent is that the council was paying £1500 a day to three interim staff which over the course of a year adds up to a very large sum of money. Now they pay for a proportion of my time, which is typically two days a week, and we’ve covered a project accountant role over there with somebody who was recently qualified and again we charge for a portion of their salary. So Swale has made a significant financial saving from that but more importantly the financial management at Kent is very strong and Swale was a council on a major improvement journey and their finance department has been on that journey too. I’d say the finance team at Swale is really punching at its weight within the council now. In terms of treasury we’ve kept the two operations completely separate. Kent will typically have £300m out on deposit and Swale will have around £10m so the two pots need managing quite differently and the additional capital Swale brings is not sufficient to give us added clout in the market to start driving down fees. We both share the same adviser – so make some savings there. Swale uses money market funds which KCC doesn’t do – I think we’ve got a good strategy in Swale for a small district with reserves amounting to 70% of our net budget.

R151: And does Kent not use money market funds because it’s big enough to manage a broad group of counterparties itself?

NV: It’s partly that. Actually Arlingclose would be very happy for KCC to use money market funds but members aren’t as comfortable as they are. Clearly, some money market funds are more transparent than others and we feel we can get the security and liquidity we need with more traditional counterparty arrangements.

R151: There was a lot of concern in the House of Commons yesterday about the timing of the Local Government Finance Bill and the risks rushing the Bill through might present to finance departments. What do you think?

NV: That’s not really my area at KCC but with my Swale hat on, the localisation of business rates is a very, very big issue. Certainly at Swale we were very pleased with the changes the Government made from the original consultation. I think it’s very important that it does get through – there are going to be all sorts of wicked issues around it but should we wait another year for it? I think we just need to get on and do it.

On the council tax benefit side – I’ve not been as involved in that but it is something that concerns us but you know, do you take an age to get things done or do you grasp the nettle and accept that things are not going to be exactly as you’d like them.

R151: There was the suggestion that you could run the new measures in tandem with the current system and see what problems arise…

NV: Well, given that everyone is safety netted for gains and losses anyway, I’m not sure what that would achieve. I’m more concerned about the timetable of the council tax benefit stuff than I am about business rate localisation. I’m not a ‘revs & bens’ man but I know there’s concern there over the need to do a consultation and create a new scheme and the time they will take but there are things in life that if you just put them off again and again you never actually get anywhere.

R151: Do you envisage your pension investment strategy changing much given what’s going on in pension reform?

NV: I suppose the trend so far has been to move towards more alternatives and the reality of those investments is that they are not as liquid as conventional equity or fixed income vehicles and the final form of what the Government comes up with for the future of the LGPS is going to be critical in terms of whether we end up with a scheme which is attractive to members or whether we see members leave in significant numbers. None of us knows enough about that yet. We have made some moves into alternatives at, I think, the relatively low risk end of that spectrum and the members aren’t going to do anything they’re not really comfortable with and don’t fully understand. We’ve got £75m with HarbourVest in private equity fund of funds, £75m with Partners Group in infrastructure fund of funds and members appointed Pyrford late last year to run a £150m absolute return mandate. So we’re not selecting single manager private equity funds in South America or anything like that. We’re staying very conventional I think with fantastic investment managers – to us the key thing is the investment managers. We’re not trying to do anything too clever or too cutting edge. In terms of the future of LGPS – we have to wait and see what it looks like and then, yes, we’ll fully assess what that means for our investment strategy and cashflow and take a view then on what liquidity we’re going to need if people do come out of the scheme.

R151: Turning to the affordability of LGPS – we don’t hear much about investment management fees. Do you think local authority pension funds pay fair value for their investments?

NV: Fund management fees account for a very small amount of money relative, in our case, to a £3bn fund. All of our mandates have gone out through EU tender processes and whilst fees have been an important consideration they’ve never been the deciding factor. And when I look at Invesco’s UK equity mandate for us, which returned 13% ahead of benchmark last year, you know, you’re going to pay more for that than for a passive mandate. At the end of the day it’s about having confidence that the manager is going to outperform – if you haven’t got that confidence you can always go passive. Up until about three years ago we had no passive investment mandates – we’ve now got about £600m of passive money with State Street so that’s money we’re no longer spending active fees on. If you have faith that an active manager is going deliver returns for you then you just have to accept that it comes at a price.