Comment: The LGPS cannot be all things to all interested parties, however good their ideas are, and it has to put its fund members first, says Room151 founder and publisher Peter Findlay.
The LGPS should invest in place-based impact projects. It should help solve the housing crisis. It should focus on build-to-let, or buy-to-rent, or modular homes, or all of them. The LGPS should invest in venture capital. Preferably British venture capital. The LGPS should help us ‘build-back-better’ and invest in infrastructure. It should allocate more to private markets.
The scheme is maturing and should prioritise income over growth assets. It should divest from big oil. And engage more with fast fashion. The LGPS should be pooled, and pooled further and faster. It should be purposeful, responsible, sustainable, efficient, and it mustn’t be profligate with its limited governance budget.
The LGPS should be globally diversified but locally impactful. It should beat inflation, vote its own shares, spot mega trends earlier, rethink 60/40 portfolio theory, hedge downside equity risk, consider some form of liability matching, write a sustainability manifesto and harness the illiquidity premium. The LGPS should deliver net zero while riding a penny farthing through the streets of Carlisle wearing an ostrich costume.
The average LGPS administering authority should do this with a handful of employees. And, let’s not forget, the LGPS should pay pensions when they fall due.
Notwithstanding the individual merits of all of the above (with the exception of the ostrich bit), the LGPS cannot be everything, everywhere, all at once. It cannot be all things to all interested parties, however good their ideas are, and it has to put its fund members first. Always.
So, when anonymous string-pullers at the Treasury, or aspirant chancellors from His Majesty’s Official Opposition, start angling for access to a bigger chunk of what they must think looks like a £350bn sovereign wealth fund, they would do well to consider the following three factors.
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Firstly, it’s not a sovereign wealth fund. It’s a pension fund which is made up of the contributions of hundreds of thousands of cleaners, data-inputters, secretaries, treasury managers, waste disposal workers, teachers, call handlers, PCN issuers, administrators, librarians and pension fund officers, to name but a few. In many cases their individual pension pots will be barely enough to get by on, and they would probably all rather like to see it invested wisely, first and foremost.
Despite the unhelpful language of ‘asset owner’, which tempts us to think the ‘owner’ can do what it (or the government) wants with its assets, let’s not forget that we’re talking about the retirement savings of hard-working people. If there’s a more efficient way of managing the LGPS, let’s hear what that is. If there are myriad infrastructure and venture projects emerging in the thriving prosperity of post-Brexit Britain which capital allocators looking for attractive risk-adjusted returns should take seriously, then let’s hear about those too.
But you can’t just say, here’s HS2, it’s big future train, you should stick some money in because you’ve got loads of it.
Secondly, infrastructure and venture capital are two asset classes well worthy of consideration. No disputing that if it fits with what you’re trying to achieve. However, if you believe they are right for your fund’s objectives, then you have a way to go before you just buy British. What about infrastructure in Africa? Or India? Or China? Aren’t they the future? The role of diversification within asset allocation, including geographical diversification, can’t just be ignored because it’s politically inconvenient. And, as George Graham points out in his recent blog, the LGPS is already buying British.
Thirdly, transparency, good governance and accountability are taken very seriously in local government, the LGPS included. And the accountability for pension fund investments sits with officers and elected members, and the council tax payer potentially picks up the tab when things go wrong.
So, why not see a little of this transparency and accountability from Treasury first? Who exactly is driving this agenda? Surely Jeremy Hunt isn’t solely responsible. Why does no one know who to speak to about this and why do LGPS pools repeatedly need to call for a seat at the table when considerations about private finance investment in British infrastructure are floated? And most importantly, if the Treasury wants the LGPS to effectively back government policy, will they step forward and help meet liabilities if things go wrong?
If DLUHC is no longer responsible for the fortunes of the LGPS, and Treasury is, then the architects should reveal themselves and speak to the sector about their hopes and dreams, and a possible role for the LGPS in it. Innit?
Investing in New Britain as it strides boldly towards the sunny uplands might very well turn out to be the best bit of business the LGPS ever did. Who knows? But what is for sure is that the merits of any investment need to be looked at carefully, and against all other attractive opportunities, in the interests of the pension fund members.
And while we lobby assiduously for the scheme’s funds and pools to look in our direction, let’s spare a thought for the officer pulled in more directions than Michelle Yeoh on a weird day at the launderette. There is only so much they can do, given their resources and, to be fair, they’ve managed pretty well so far.
Whatever the outcome of the forthcoming consultation is, and whatever reforms are agreed upon, I’ll bet this: that asset allocation will still sit with the 80+ administering authorities well into the future. And until you change that, there is simply a limit to what small pension teams in municipal offices can achieve when there are only five days in a working week.
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