UK infrastructure, from electricity generation to transport, is creaking – yet government borrowing is at an all time high. Thank goodness, then, for the ‘Bank of Grandma and Grandpa’. The UK government has discovered a dangerous new taste for the public pension pot, planning to force all local authority funds in England and Wales to pool their £200bn or so of assets and use the money more creatively. ‘Pool’ in this sense also meaning ‘lose control of’.
These are huge changes that involve everyone, yet they have been left surprisingly shadowy. I have no doubt that this is because the arguments given to support them do not stand up to scrutiny.
Certainly, the UK has spent less on infrastructure than other OECD countries over the past three decades. But it’s not so clear that to catch up it must, as the government claims, finance a large share of infrastructure spending to 2020 and beyond through private capital and long-term financing instruments.
London mayor Boris Johnson has led the charge. The outoing mayor put Edmund “Edi” Truell in charge of London’s pension pot, the London Pensions Fund Authority, in 2012, a post he held until being named the mayor's advisor on pensions last August. The appointment was made on Johnson’s personal recommendation and in trademark Johnson style. At Truell’s confirmation hearing it emerged that he had not provided either a CV or a statement of interests.
The mayor has described Truell’s work as “a triumph of service to public finance” and seems to have been thinking of him when he recalled, in his column for the Daily Telegraph, a conversation with a minister on the subject of pension funds. “I told him, there are more than 39,000 public-sector pension funds in this country – each with its own trustees, each with its own managers and advisers and accountants”, Johnson wrote, all of them “sucking at the udders of the state”. The waste was “extraordinary” and Johnson foresaw savings of up to £17 billion over 5 years by merging them.
Publicly then, pension funds are being merged to save money. It’s already claimed that pooling two LGPS schemes from London and Lancashire has saved £32m over 5 years (despite London expanding its investments team six-fold).
Curiously, however, there are nothing like 39,000 funds. The government has estimated perhaps only 400. The OECD has used a figure of 1,000 funds – even in working documents pressing the pooling approach.
Similarly, for all the talk about wasteful duplication, most public sector pension provision is in large, unfunded schemes, such as those for teachers and civil servants, and these do not incur fund management charges.
In short, huge efficiency savings are fictional. In which case, why would anyone consider the ‘invest big and take more risks’ approach an appropriate one for pensions? Truell has assailed the lack of ambition of UK pensions investors: “There’s this pathetic attitude to risk and reward which really, really disappoints me as an investor”.
Following his appointmen at LPFA, Truell quickly set about overhauling the running of the London fund, ousting trustees and external consultants. He sold the scheme’s entire £1bn portfolio of UK gilts saying that their prospects were too low (a move completely at odds with the prevailing wisdom in council pension plans, which buy gilts to match long term pension liabilities) and raised its exposure to alternative asset classes such as housing, private equity and infrastructure. Because, under the new, ‘frugal’ approach, low yielding (safe, dull) investments must give way to sexy new ones.
In 2015, the London Pensions Fund Authority and the Greater Manchester Pension Fund allocated £500m for infrastructure investments. Such strategies are helpful to central government by reducing its own borrowing costs, but represent a ‘novel’ reinterpretation of pensioners’ own interests. It has been argued that using local government pension funds like this sets a dangerous precedent as it means investing employees’ money in the business of their employers.
Conventionally, pension funds should only be invested in whatever provides the best return, while public authorities should fund their investments in the open market. But unconventional thinkers are now in charge. The London fund’s head, Susan Martin, says that in the UK we need a “revolution” in pensions and she has some original ideas about how that revolution could unfold in the public sector. Why not, for example, give the physical assets of the NHS to what could become a funded NHS Pension Fund, and then gamble – sorry, invest – with that?
The LPFA’s first ever private-equity co-investment, completed last year, was radical too. It involved teaming up with Swiss private equity manager Adveq to buy a stake in postal company Secured Mail.
Recall too, that debt can be repackaged and sold – as with mortgages in the run up to the 2008 crash. But a significant precedent was created in 2014 when pension fund trustees were permitted by the High Court to sell on debts owed to a pension scheme.
Pension funds are blamed for fuelling the taste among banks for developing the high-yielding, risky financial instruments of the kind that brought the world to its knees in 2008. Ever since, banks have been on a tight leash. Could it be that pension funds are now being used by the same kind of people as a Trojan horse?
