Questions Raised Over UK Public Pension Reform

UK Chancellor George Osborne has confirmed plans to pool the country’s 89 local authority pensions into six “British Wealth Funds” to boost investment in infrastructure.

But the announcement immediately raised questions about the government’s ability to make such radical changes, and the implications for who will ultimately control the assets of the UK’s public sector pensions. Pension funds in England and Wales are valued at approximately £192 billion ($291 billion), while Scottish pensions will remain under the scope of the Scottish government.

In a speech at the Conservative Party conference in Manchester yesterday, Osborne said pooling the pensions “will save millions of pounds every year in costs and fees”. “The new funds will develop the expertise to invest in infrastructure,” he added.

While no further detail has yet been given by the Treasury as to how these funds will be constructed, the announcement has created further confusion in the public pensions sector as goes against statements made in the UK’s latest Budget.

In July, Osborne’s report mooted the prospect of forcing local government pension schemes (LGPS) to collaborate, but stated that he would “invite local authorities to come forward with their own proposals to meet common criteria for delivering savings”.

A consultation with public pensions has now closed, and the Treasury will consider the responses over the next month before publishing its full proposal, a spokesperson told CIO.

Clifford Sims, partner at law firm Squire Patton Boggs, warned yesterday’s statement from the chancellor “suggests that government may limit individual funds’ freedom to choose with whom they wish to pool”.

If the UK government brings in legislation to force the creation of British Wealth Funds, Sims added, “the big question appears to be: is investment decision-making going to be determined by central government?”

“If so, it would seem to undermine the fiduciary powers that administering authorities currently have, and raises the risk that central government will carry the can if infrastructure investments do not perform as the government no doubt hopes,” Sims added.

The Treasury spokesperson told CIO that the government was “not going to impose anything in terms of implementation or regions. The only stipulation is that the pools have to be around £25 billion.”

Government plans to create the wealth funds—which Osborne said would be roughly £25 billion in size—came to light at the end of August when it emerged that ministers had met with public pension officials to discuss the possibility of the move.

“For some time we have been calling on government to take in to account the resources of the LGPS and invite UK funds to invest in these UK projects,” said Sir Merrick Cockell, chair of the London Pension Funds Authority. “While we await the detail behind this announcement, we are already well underway in forming partnerships with other funds.”

Unison, one of the UK’s biggest unions, cautiously welcomed the chancellor’s statement of renewed investment in infrastructure, but urged the government to ensure that investments were still made in the best interests of members.

“The collapse of investment in infrastructure is entirely down to the inability of the banks to lend, and of the government’s failure to see public investment as a means of growing the economy again,” said Dave Prentis, Unison general secretary.

“The chancellor shouldn’t use our pension funds as a convenient way of making up for the infrastructure investment that no longer happens,” Prentis added. “Nor should they be used as replacement capital for the government’s privatisation programmes.”

UK public pensions have traditionally invested very little into local infrastructure. Scale and resources are major problems, with funds in England and Wales having less than £3 billion in assets on average and very few in-house staff.

According to the Treasury spokesperson, the government believes the reason infrastructure investment has not been picked up is due to a “lack of expertise. When these funds get bigger, they will develop the ability to access infrastructure.”

Squire Patton Boggs’ Sims said funds had also been reluctant to enter the asset class due to “political risk and the absence of government guarantees to attract investment”.

Speaking at a NAPF conference in May, Lancashire County Council CIO Mike Jensen said government ministers had shown a “surprising” lack of engagement with UK pensions, after it emerged his fund was among the bidders for the UK government’s £400 million stake in Eurostar. The holding in the train operator was sold to Canada’s Caisse de dépôt et placement du Québec for more than £750 million in March.

“We tried to persuade government that the idea of retaining that asset within the UK tax base had more value than just the price paid,” Jensen said. “We didn’t get a favourable hearing on that. I think there should be mileage in that for a long term investor.”

Related: London United; We’re Not ATMs, Pensions Warn Politicians; Why UK Pensions Can’t Buy UK Infrastructure

Additional reporting by Elizabeth Pfeuti