Scottish Local Government Pension Scheme (SLGPS) funds could adopt pooling, a full merger or increase informal cooperation, according to new proposals.
The SLGPS Advisory Board this week launched a consultation on the future shape of LGPS funds north of the border, with a fourth option of retaining the status quo.
The board has outlined the pros and cons of all the options based on their potential effect on fees, good governance, operating risks and the ability to encourage more infrastructure investment.
In his foreword to the report, Derek Mackay, the Scottish finance secretary, said he was “ambitious for greater investment by local government funds in Scotland’s infrastructure”.
He added: “We look to LGPS fund authorities to improve their already positive impact on the economy thereby contributing further to sustainable economic growth, creating more jobs and supporting the delivery of key capital infrastructure needs in Scotland, such as transport projects and housing.”
The consultation document concluded that pooling, or a full merger of funds, are the options most likely to result in an increase in infrastructure investment.
David Crum, director of pension fund adviser 330 Consulting and former chief pensions officer with Strathclyde Pension Fund, said: “The finance secretary’s foreword mentions ‘infrastructure’ six times in its first four paragraphs, so one can clearly identify where the Scottish Government’s interests lie.
“To be fair to them, they’re not really any different from the original political drivers behind the LGPS pooling exercise in England and Wales.
“Governments seem to think they can get their hands on lots of lovely pension fund money to rebuild the infrastructure in the UK.”
However, Crum added that this aim was unrealistic, with fund allocations to infrastructure generally in the range of 0-10% of total assets and spread across the whole world, rather than just the UK.
David Walker, head of LGPS investments at adviser Hymans Robertson, said: “It isn’t clear the extent to which any of the options will facilitate greater investment in Scottish infrastructure.”
In February, the Scottish Futures Trust announced separate plans to develop proposals for a property and infrastructure vehicle to pool investments from some, or all, of Scotland’s 11 LGPS schemes.
Crum also warned that the consultation’s aim of reducing costs would not be easy to achieve.
“Sure, you can employ a low cost asset manager, or have a large allocation to passive, which is relatively inexpensive,” he said.
“But how well do either of those approaches fit in with the funding strategy and asset allocation strategy?
“A race to the bottom on costs would absolutely be the wrong thing for such important funds.”
Crum said that the best option, if the driver was purely about cost reduction, would be to adopt the option of better cooperation between funds, rather than a full merger or pooling.
He said: “Framework agreements for common services such as asset management have the potential to deliver real purchasing power to smaller funds, since fees charged are negotiated on behalf of all funds who have access to the agreements.”
However, in a briefing on the document, the UNISON Scotland said that collaboration “offers only modest gains in scale while retaining complex governance arrangements”.
Walker said that the England and Wales pooling process, as it evolves, will provide evidence and examples of what the benefits and challenges are for the investment pooling option.
But, he added: “Scotland is coming from a slightly different place in terms of internal resource versus some of the English and Welsh funds so the pooling solution might look different.”
UNISON Scotland also voiced concerns about pooling, saying: “Governance is a problem with this model and UNISON colleagues in England and Wales have significant concerns.”
A spokesperson for the Convention of Scottish Local Authorities said it would formulate a response to the consultation by the early autumn. The consultation is open until December.
