• Home
  • About
  • Subscribe
  • Conference
  • Events Calendar
  • Webcast151
  • MOTB
  • Log In
  • Register

Room 151

  • Treasury
  • Technical
  • Funding
  • Resources
  • LGPS
  • Development
  • 151 News
  • Blogs
    • David Green
    • Agent 151
    • Dan Bates
    • Richard Harbord
    • Stephen Sheen
    • James Bevan
    • Steve Bishop
    • Cllr John Clancy
    • David Crum
    • Graham Liddell
    • Ian O’Donnell
    • Jackie Shute
  • Interviews

The problem with the London superfund…

0
  • by Agent 151
  • in Agent 151 · LGPSi
  • — 20 Feb, 2013

A151-banner

Agent 151 is a senior local authority finance director and S151 officer writing exclusively for Room151. 

My old pals who are London finance directors are shaking their heads over the first pronouncements of Edmund Truell, the new chairman of the London Pensions Fund Authority (LPFA).

Truell has announced that he plans to merge the London borough funds into a single scheme.  This is not a new idea. Indeed, the LPFA has been pursuing it for some time, and last year commissioned a rather one sided report by the Cass business school in support of its arguments.  Sitting behind the plan is the idea that ‘size is important’ in the pensions world, and this view is to some extent supported by the Hutton review of public service pensions, which found that collaborative working could achieve efficiency savings.  The total value of the assets of the funds of the thirty two London boroughs, LPFA, and Transport for London is in the region of £40bn, a very respectable size if merged – indeed the total value of local authority funds in England was recently estimated at £150bn, with Greater Manchester weighing in at over £11bn and county funds up to around £4bn apiece.

The hypothesis behind Truell’s plan is presumably that merging the borough funds would make large savings in investment management charges and administration costs, and it is hard to argue against this.  Truell goes further, however, making the accusation that public pension funds “have not been monitoring investment managers well and have not kept an eye on the asset classes their money is in.”  Ignoring the uninformed insult, the hypothesis here appears to be that greater size breeds better quality, and this is problematic. Local authority funds are the recipients of top notch expert advice on investment.  Can a larger fund expect better advice simply by dint of its size?  Do larger funds always perform better?  I think not.

Truell also says that public pension funds have underestimated their liabilities. Again, can a bigger fund expect better actuarial advice?  If anything, the advice is likely to suffer as a result of complexity: a single fund with multiple employers on the scale he is envisaging would undoubtedly be a major headache for any actuary.

The creation of a superfund for London (if you’ll pardon the pun) also raises the question of whether democratic accountability for fund management will be lost, or at least muddied.  At present, the level of employer’s contribution made by each council impacts directly upon their council tax rate decision.  This direct relationship will be lost, as under Truell’s proposal performance will no longer be directly attributable to local decisions.  Is this important?  Well, with the DCLG busy undermining councils’ discretion to increase council tax by imposing an artificially low limit beyond which a local referendum is required, it appears that they, at least, don’t think so. But council tax payers might prefer accountability through the ballot box to none at all!

Presumably in order to drum up political support for LPFA’s scheme, Truell has also announced that the merged fund would channel more investment into London housing infrastructure.  This is a desire voiced by a range of senior politicians, including Boris Johnson and Eric Pickles, and on the face of it is an attractive proposition, although it is, of course, not at all dependent upon a merger of funds.  However, the problem with this idea is that it assumes that there is a huge list of housing and infrastructure projects that will generate decent and stable returns which can’t get off the ground because there are no funders coming forward.  This is patent nonsense.  Are we therefore to understand that in return for political support the new merged fund would get infrastructure projects away by accepting a lower or more risky return than the market would?.  Social benefit as an element of the return is desirable, but not, as any trustee worth their salt will tell you, at the expense of hard cash!  The fact is that it would potentially be unlawful for any council (as trustee) to take decisions in relation to its pension fund on the basis of considerations other than the best interests of that fund.  So any overtly political manoeuvring by Mr Truell on infrastructure investment may ultimately be self-defeating, rendering it impossible for London boroughs to sign up to his proposals.

A more sensible approach is being proposed through the Society of London Treasurers, which consists – in essence – of the boroughs acting together to join, or create, investment funds.  This proposal allows them to enjoy the benefits of size without the difficulties of merging.  Councils will retain asset allocation and funding strategy decisions, but investments will be aggregated generating cheaper management fees and procurement costs.  We must hope that Mr Truell is willing to engage with this, much less controversial, proposal.  In the meantime, we can watch as he holds the LPFA management to account for not having monitored their investment managers well and not having kept an eye on the asset classes their money is in, whilst they sell off their gilts and plough the money into London housing and infrastructure projects!

Of course, any portfolio really ought to make an attempt to balance risk effectively, and the risk generated by a geographical focus on London really ought to be diversified away by investing elsewhere too.  Which gives me an idea!  Dear Mr Truell…

Share

You may also like...

  • LGPS pools: Navigating the impact of a pandemic 19 May, 2020
  • James Bevan: Confident bulls and desperate measures James Bevan: Confident bulls and desperate measures 16 Mar, 2016
  • Doug McMurdo: LGPS, the Stewardship Code, good governance and protecting capital Doug McMurdo: LGPS, the Stewardship Code, good governance and protecting capital 4 Dec, 2019
  • LAPF Strategic Investment Forum & Dinner: February 7th, 2013, Landmark Hotel, London LAPF Strategic Investment Forum & Dinner: February 7th, 2013, Landmark Hotel, London 25 Oct, 2012

Leave a Reply Cancel reply

You must be logged in to post a comment.

  • Register to become a Room151 user

  • Latest tweets

    Room151 15 hours ago

    What role will climate change have on the pricing of government bonds?: Sponsored article: Kerry Duffain finds that “vulnerability and resilience to climate change” have a significant impact on the cost of government borrowing. Ardea Investment… dlvr.it/RtNKv7 pic.twitter.com/wDjT31x4Yt

    Room151 1 day ago

    ESGenius: Slashing emissions will fuel green growth for decades: Sponsored article: Velislava Dimitrova argues that a big enough investment could mean transition to a low, or no, carbon economy can become a reality. The world needs to slash carbon[...] dlvr.it/RtKZJp pic.twitter.com/cd8S3ijERl

    Room151 1 day ago

    Prudential code: “Not perfect, but its heart is in the right place”: The new Prudential Code offers revised rules for borrowing. Nikki Bishop is sceptical it will work while Gary Fielding offers his support. Nikki Bishop I have been asked to give[...] dlvr.it/RtKZFh pic.twitter.com/OriN28lXcb

    Room151 2 days ago

    Tremendous report from @MarkSandford3 citing @room_151 no fewer than six times (despite what the @lgcplus fact checking/counting dept might tell you) #localgov commonslibrary.parliament.uk/research-brief… 1/5

    Room151 1 week ago

    Dan Bates: Capitalisation directions are not the only tool for rebuilding finances: Dan Bates argues deep seated problems are contributing to a rush for capitalisation directions. For some time now we have been reading that a number of councils are in… dlvr.it/RspKff pic.twitter.com/xRRsgVim9u

    Room151 2 weeks ago

    Is local government funding “broken”?: Andrew Hardingham looks at the underlying issues that caused more than a third of respondents in the Room151/CCLA treasury survey to say that the funding system for local govenrment is[...] dlvr.it/RsYhsg pic.twitter.com/plNp7Ayys6

    Room151 2 weeks ago

    GameStop: A lesson for LGPS in the risks of short selling: Day traders coordinating their efforts through the social media platform Reddit have not only boosted the stock of US GameStop, but also badly hurt hedge funds engaged in huge bets[...] dlvr.it/RsGdVV pic.twitter.com/NTMC3j6J2u

    Room151 2 weeks ago

    Room151 panel backs unitary councils and devolution: Bigger isn’t always better when it comes to local government, according to Sir Bob Kerslake, chair of the Peabody Trust, but “ …we need to move to unitary government and[...] dlvr.it/RsFPNv pic.twitter.com/lT4eCi0TmV

  • Categories

    • 151 News
    • Agent 151
    • Blogs
    • Chris Buss
    • Cllr John Clancy
    • Dan Bates
    • David Crum
    • David Green
    • Development
    • Forum
    • Funding
    • Graham Liddell
    • Ian O'Donnell
    • Interviews
    • Jackie Shute
    • James Bevan
    • Jobs
    • LGPSi
    • Mark Finnegan
    • Recent Posts
    • Resources
    • Richard Harbord
    • Stephen Fitzgerald
    • Stephen Sheen
    • Steve Bishop
    • Technical
    • Treasury
    • Uncategorized
  • Archives

    • 2021
    • 2020
    • 2019
    • 2018
    • 2017
    • 2016
    • 2015
    • 2014
    • 2013
    • 2012
    • 2011
  • Previous story Andrew Burns on strategic finance, the ‘care cap’ and commissioning for outcomes
  • Next story Accounting for investments – an alternative view

© Copyright 2021 Room 151. Typegrid Theme by WPBandit.