From the TUC

DCLG ignores trade union concerns about local authority pension investments

08 Mar 2013, by Guest in Economics, Pensions & Investment

The government has decided to increase the limit on investment in partnerships by local authority pension funds from 15 to 30 per cent. This means that nearly a third of funds can be allocated to this asset class. The government’s intent is to increase the amount that funds can invest in infrastructure.

Although not opposed to infrastructure investment by local authority funds in theory, the measure was opposed by trade unions on several grounds – although it would be hard to tell from reading the Department for Communities and Local Government’s summary of consultation responses alone.

When is a consultation not a consultation? When it is a plebiscite. There is a frustrating tendency in government consultation exercises to simply tot up the number of respondents for or against particular options or approaches. For example (from the ‘investment in partnerships’ summary):

A total of 51 respondents supported Option A ie increase the limit on investments in partnership from 15% of a local authority pension fund to 30%, with 15 not in support.

It concludes:

In view of the fact that some 80% of those responding to the two main options supported Option A… the Minister decided to move speedily to remove the perceived barrier.

The document offers no breakdown of the type of respondents supporting the measure, nor those in opposition. This is despite the fact that all of the trade unions that responded – the only respondents who actually represent the members of local government pension schemes – were in the latter camp (here are links to the Unite, Unison and GMB responses).

The TUC’s response emphasised several key concerns about the government’s proposals, including:

  • The lack of evidence that the current regulations, including the 15 per cent limit on investment in partnerships, serve as a significant barrier to infrastructure investments.
  • The partnership investment class is not dedicated to infrastructure investments. Any increase in the limits would enable more capital to be directed towards investments in, for example, private equity.
  • Partnership investments can be expensive and risky. Even infrastructure investment is likely to carry significant risk. While taking on these risks is sometimes justifiable, investment decisions involving employees’ pension saving should be made purely in the best interests of the scheme members.
  • Local authority pension funds’ governance arrangements encompass serious conflicts of interest, given the role of elected councillors in overseeing local schemes. The government’s proposal therefore risks further politicising investment decisions.

Central government is of course best placed to finance infrastructure projects. This does not mean that pension funds should not be involved too, where appropriate – it is sensible for any pension fund to hold a diverse range of asset types, and allocating some capital to infrastructure may represent a responsible approach to fund diversification, as well as a boost to the real economy.

But in terms of local authority funds, there is more work to be done on ensuring robust assessments of risks and returns before funds should be encouraged or facilitated into greater exposure to partnership investments in particular. The proposals do not appear to have been developed in response to a demand from funds for change, but rather the government’s anxiety about delivering growth in the context of its self-imposed fiscal straightjacket (typified by Vince Cable’s recent wobble).

Economies of scale, not deregulation, are the best way for pension funds to deliver infrastructure investment. This is precisely why last month’s announcement of a merger of London’s local authority pension funds coincided with the London Pension Fund Authority’s decision to join the NAPF-led Pension Infrastructure Platform – a move entirely possible even without the removal of the 15 per cent limit on investments in partnerships.