West Yorkshire Pension Fund (WYPF), which manages £18bn of assets, has agreed to commit £100m towards the inter-authority lending market to help overcome the “credit crisis” facing councils.
15th LATIF North | York | 19 March
The Local Government Pension Scheme (LGPS) fund will lend no more than £20m to any single local authority, with the maximum duration of the loan being one year. Interest rates on the borrowing will be “market dependant”, Room151 understands.
In the past, LGPS funds have lent money through the inter-authority borrowing market, such as Derbyshire, however it is mainly used for short-term lending between local authorities. The main positive of the market is due to the “lower” interest rates offered compared to other lending facilities available to councils, such as the Public Works Loan Board (PWLB).
Talking to Room151, Mark Russell, investment and treasury manager at WYPF, explains that the fund’s £100m (0.5% of the fund) commitment was influenced by the current “credit crisis” in the inter-authority borrowing market.
We are a very cashflow-positive pension fund, and we are fully funded. So, we think it’s in the spirit of local government bodies to help other local government bodies that are less fortunate than ourselves in terms of our cash flow position, without compromising our treasury policies – Mark Russell, investment and treasury manager, WYPF.
‘Reticence’ in market
Russell highlights that since September last year and Birmingham’s issuance of two section 114 notices, the financial stability of the local government sector has deteriorated. This in turn has led to a “reticence” in the market to potentially lend to authorities that are in “slight difficulty”.
“One of the reasons that we wanted to invest was because we’ve seen the difficulties in the market from Bradford Council’s perspective.
“The fact of the matter is that since Birmingham the problem [councils’ financial stability] has gotten much worse, to the point whereby every day I’m seeing huge lists of borrowers and absolutely nobody with any cash,” he explains.
Over the past year, local authorities have experienced significant funding challenges due to the increasing demand for services and underfunding, with many councils warning of potentially issuing a section 114 notice in the near future.
However, unlike local authorities, WYPF is fully funded at around 107% and in a cashflow positive position, putting the pension fund in a good situation to provide liquidity to the market, Russell states.
“We are a very cashflow positive pension fund, and we are fully funded. So, we think it’s in the spirit of local government bodies to help other local government bodies that are less fortunate than ourselves in terms of our cash flow position, without compromising our treasury policies.
“The sector needs to think a bit more outside of the box in terms of ways in which pension funds can help authorities, particularly in the short term.
“This was at the forefront of my mind when putting together this proposal and I would definitely like to see more pension funds doing it,” Russell continues.
Russell suggests that loans to local authorities will be made at the discretion of the pension fund, with it potentially increasing its allocation to the market “presuming all goes well”.
It seems rather unfair and just not equitable, that you’ve got local authorities out there that are so desperate for cash that they’re willing to pay above PWLB levels – Mark Russell, investment and treasury manager, WYPF.
S114 credit positive event
Another reason for the reluctance to lend through the inter-authority lending market is due to high-profile cases of authorities who have unwisely used the form of borrowing.
However, Russell says that WYPF is not going to ban lending to authorities who have issued a notice or are in section 114 territory. In fact, he states that the fund agrees with the notion that a section 114 is a credit-positive event due to it effectively bringing the authority “under the wings of central government”.
From a fund perspective, Russell states that the investment is beneficial for WYPF as it adds a new counterparties within its cash portfolio, currently valued at 4%.
Despite WYPF being fully funded, the pension fund is not looking to de-risk, however the commitment allows it to “diversify” risk within its liquid portfolio. “So, it further diversifies the cash side of things and spreads the risk away from commercial institutions to effectively institutions that are government guaranteed,” Russell adds.
PWLB flaws
As a result of the lack of cash flow in the inter-authority lending market and high-interest rates, some authorities have turned to the PWLB for short-dated borrowing. This is despite the PWLB being a lending facility predominantly focused on long-term loans priced at gilts plus 40 basis points.
“It seems rather unfair and just not equitable really, that you’ve got local authorities out there that are so desperate for cash that they’re willing to pay above PWLB levels.
“So that’s why this zero to one- or two-year local authority market is so crucial for local authorities to smooth out the funding gap,” Russell states.
The constraints of the PWLB are the longer settlement, with turnaround times of five working days after loan applications, and the limitations on what councils can borrow for, Russell highlights.
“We need this market to be liquid and fit for purpose and I very much hope that this [WYPF’s commitment] will be the start. Hopefully, a solution that in part encourages other people to inject some liquidity into this market,” he explains.
—————
FREE weekly newsletters
Subscribe to Room151 Newsletters
Follow us on LinkedIn
Follow us here
Monthly Online Treasury Briefing
Sign up here with a .gov.uk email address
Room151 Webinars
Visit the Room151 channel
