I recommend that you read the article by Anthony Hilton, in the London Evening Standard of 11th February 2016 (Page 54) “Scandal of Chancellor’s pensions meddling”. But I will outline the main points here.
The UK Chancellor of the Exchequer, George Osborne, is quietly putting in place a plan to take effective control of the UK’s local government pension schemes so that he can tell them to invest in infrastructure projects.
Now the UK’s local government pensions are funded schemes – that is they have real money in their pots which has been put in by the employees and the employers – in other words it belongs to the current and future pensioners: it does not belong to the Government.
However, the Chancellor has asked the nearly 90 bodies which make up the Local Government Pension Scheme to transfer all of their funds and assets into a few larger ‘investment pools’: the argument being that fewer funds requires less over-all spent on administration and management costs. According to Anthony Hilton, there is no doubt that if this is not done voluntarily the Government will consider forcing them to do so.
But, on top of this, the Chancellor is calling these new, bigger, pension funds, ‘Sovereign Wealth Funds’ despite them not belonging to the UK Government, and he will expect these funds to invest 25% of their assets in infrastructure, and the draft regulations make it clear that these funds will have to do what the chancellor wants them to do.
This is dangerous stuff. Pension funds need to have a long-term and secure income stream in order to pay out to its beneficiaries, and it is the job of the trustees to make judgements as to what is safe whilst giving them the income stream they require. This is why pension funds normally invest in projects and companies which are already in existence, with proven and often secure income streams, from which much risk has been removed. In addition, pension funds do not have the skills and experience in managing the delivery of capital and infrastructure projects. This is why pension funds rarely invest in the construction phases of projects; because the cap-ex side of things are too risky and do not match the required risk profile of the pension funds.
As Anthony Hilton says: ‘Buying completed infrastructure is one thing; building it from scratch means taking on all of the risks of planning and construction and cost overruns. That requires a quite different set of skills and exposes the funds to a wholly different level of risk.’
As the responsibility, by law, of trustees and investment managers is to decide where to invest in a way which gives the returns required whilst balancing this with risk, it is going to be very interesting (if that is a appropriate phrase) to see what happens – will they accept instructions from Government which are against the best interests of their members and thus clash with the duties and obligations of trustees?
Will the UK Government be telling pension funds to invest in infrastructure schemes which everyone else has decided are too expensive and too risky? And what happens when it all goes terribly wrong?
This is no way in which to finance the UK’s infrastructure. I have said in the past that the UK’s pension industry will not fund the construction of the UK’s infrastructure; not without someone (i.e the UK’s tax-payers) underwriting the risk – it looks like the UK Government is trying to get around this by being able to tell the Local Government pension schemes where they have to ‘invest’.
On top of all this, I think it is wrong anyway to get pension funds, or other institutions and funds, to finance public infrastructure via direct investment– the income streams to pay back their investment will have to be met from charges to users or from direct payments from the tax-payers, and in either case the payments are higher than if the infrastructure was directly funded by Government as the latter can borrow much cheaper than the rate of return required by the pension funds. It is about time we questioned why the UK Government is willing to fund and finance things in the most expensive way possible rather than that which is cheaper as a whole for the UK’s citizens; and to hold them to account for doing so.