LGPS: Chancellor’s regional pooling questioned

George Osborne this week announced that he wants to see Local Government Pension Scheme investments pooled on a regional basis – an approach immediately questioned by leading figures in the sector.

Speaking to the Conservative Party conference in Manchester this week, Osborne seemed to partially pre-empt the outcome of the forthcoming consultation on LGPS pooling by backing the creation of regional pools.

He branded the pools “British Wealth Funds” and said they would help increase the sums invested by LGPS funds in domestic infrastructure projects.

“At the moment, we have 89 different local government pension funds with 89 sets of fees and costs. It’s expensive and they invest little or nothing in our infrastructure.” he said.
“So I can tell you today we’re going to work with councils to create, instead, half a dozen British Wealth Funds spread across the country.

“It will save hundreds of millions in costs, and crucially they’ll invest billions in the infrastructure of their regions.”

Nick Greenwood, pension fund manager at The Royal County of Berkshire Pension Fund, told Room151: “It is disappointing that the chancellor has apparently announced the outcome of the consultation before it is launched.

“I am not sure that a regional approach is the right one, as there is a risk that poor performance in one pool could lead to contribution increases that impact council tax across a whole region.”

Mike Jensen, chief investment officer of Lancashire County Pension Fund, said: “The suggestion that this should be regional is a bit odd, given the concentration of the bigger funds in the North and West Midlands, but the idea is obviously in tune with our thinking, hence our joint venture with London.”

But Linda Selman, head of local government investment at pensions investment consultancy Hymans Robertson, said the chancellor’s position may be more flexible than it first appeared. “Our understanding is that while there is a preference from government for regional pools, this is not set in stone. If there are other ways to make savings then they are still on the table,” she said.

A spokesperson for the Conservative Party confirmed that the chancellor’s announcement was not prescriptive, and that the size and shape of the pools was only “rough”.

Selman said that LGPS funds currently have around 1% of around £200m of investments in infrastructure. Raising that to around 10% to match some foreign pension funds would bring in a maximum of an extra £20bn to the sector.

“Dividing that between six or more regional pools may make it slightly less easy to achieve diversification of investment – a national infrastructure pool may provide more opportunities and could still sit alongside regional arrangements,” she said.

Greenwood warned that the ability of individual funds to set their own investment strategies and asset allocations could be eroded under the proposed new arrangements.

“Unless competitive tension is created there will be an inevitable move to lacklustre performance due to index tracking and similar asset allocation for everyone.”

Competition could be created, he said, by the publication of cost and performance league tables and the ability for funds to move between pools.

The Conservative Party spokesperson said there will be no compulsion for funds to invest in infrastructure.

Jeff Huston, head of pensions at the Local Government Association, said that the chancellor had “seen the appetite large pension funds in the US and Canada have for infrastructure and wants to create the same sort of environment here”.

However, he said Osborne’s branding of the new pools as wealth funds was “unfortunate as their primary purpose remains the payment of pensions not investment in any particular asset class”.

UNISON general secretary Dave Prentis said: “The chancellor shouldn’t use our pension funds as a convenient way of making up for the infrastructure investment that no longer happens. Nor should they be used as replacement capital for the government’s privatisation programmes.

“PFI has been a disaster for both the pension funds investing in it and the public authorities who are now having to pick up the costs. Yet another abuse of our members’ pension funds cannot be allowed to happen.”