Scot­land’s big idea

It’s one of the great po­lit­i­cal puz­zles. How do we find the money to build the in­fra­struc­ture that keeps the traf­fic mov­ing or the hos­pi­tal wait­ing lists down? For some the an­swer is sim­ple – take the bil­lions sit­ting in pub­lic pen­sion funds, put it to­get

The Herald on Sunday - - THE WEEK -

IT was Ge­orge Os­borne’s big idea. Just over three years ago in his last speech to the Tory con­fer­ence, the then-Chan­cel­lor an­nounced six new “wealth funds” to in­vest bil­lions in Bri­tain’s of­ten crum­bling in­fra­struc­ture.

Os­borne, speak­ing against a back­ground of red, white and blue, was in a ju­bi­lant mood af­ter win­ning the 2015 Gen­eral Elec­tion. He had just de­clared the Con­ser­va­tives to be the party of work, of “labour”.

“We are the builders,” he added, “and to build, you must build on solid foun­da­tions.”

The Chan­cel­lor did not have new tax­payer cash to pay for all this con­struc­tion. But he did have pen­sion­ers’ money.

His aim: to restyle and re­fo­cus 89 lo­cal gov­ern­ment pen­sion funds, the fu­ture in­comes of hun­dreds of thou­sands of pub­lic-sec­tor work­ers, into en­gines of eco­nomic regen­er­a­tion.

Six su­per­funds, to­gether worth some £200 bil­lion, would be big enough to save hun­dreds of mil­lions in fees and costs and pay for new schools, bridges, homes and pris­ons.

Party loy­al­ists cheered.

Less than a year later Os­borne was gone, his po­lit­i­cal ca­reer ended by Brexit. White­hall be­come en­grossed in the com­plex­i­ties of leav­ing the Euro­pean Union. And pen­sion funds un­der­went their own tricky process of pool­ing and merg­ing.

Grad­u­ally, though, the funds started to put money into in­fra­struc­ture. Lo­cal Gov­ern­ment Min­is­ter Rishi Su­nak last sum­mer said he wanted the funds to put one-tenth of their in­vest­ments into in­fra­struc­ture. That would be £20bn.

Watch­ing the English re­forms were Scot­tish min­is­ters. They, like Os­borne, hoped to un­leash the power of coun­cil pen­sions on the real econ­omy. Last sum­mer, with lit­tle fan­fare – and no cheer­ing sup­port­ers – the Fi­nance Sec­re­tary, Derek Mackay, a for­mer coun­cil leader him­self, an­nounced an in­de­pen­dent con­sul­ta­tion on how to do so.

Should Scot­land’s 11 funds – worth more than £42bn at a re­cent count – merge in to one? Should they team up to run pooled in­di­vid­ual in­vest­ment funds, rather like what is hap­pen­ing in Eng­land? Or should they sim­ply work more closely to­gether?

And what, if any­thing, would such re­forms do to lure some Scot­tish pen­sion money out of global fi­nan­cial mar­kets into real-world in­vest­ments closer to home.

The stakes could barely be higher. Just match­ing Eng­land’s as­pi­ra­tion of in­vest­ing one-tenth of lo­cal coun­cil pen­sion funds into in­fra­struc­ture could re­lease £4bn, or £4.5bn. That is a lot. To give just a sense of the scale, it would be enough to pay for three more Queens­ferry Cross­ings, four Aberdeen by­passes or five new su­per hos­pi­tals such as Glas­gow’s Queen El­iz­a­beth.

Any gov­ern­ment, lo­cal or na­tional, has a wish­list of cap­i­tal projects but, in an age of aus­ter­ity, far from al­ways the ac­cess to cash to carry them out. And that is not just a cur­rent bud­get prob­lem. Get­ting credit is also an is­sue.

The Scot­tish Gov­ern­ment has a cap­i­tal bor­row­ing cap of £450 mil­lion a year and no more than £3bn over­all. There are var­i­ous schemes – such as the old pri­vate fi­nance ini­tia­tive or the new non-profit dis­tribut­ing (NPD) – for bring­ing in pri­vate money.

And the UK Gov­ern­ment has also been con­tribut­ing through City Re­gion Deals.

Late last year, Mackay sig­nalled cap­i­tal projects of some £5bn in his 2019/20 bud­get. But he and oth­ers want more. So get­ting well-funded lo­cal gov­ern­ment pen­sion funds to in­vest – usu­ally in re­turn for safe, fixed long-term re­turns – is a pri­or­ity.

Some funds, such as the gi­ant Strath­clyde one (which is nearly as big as the rest put to­gether) are al­ready putting pen­sion­ers’ money in Scot­tish bricks and mor­tar. The prob­lem? Some of the funds are just too small to front the kind of money needed on their own. Hence talk of re­form north of the Bor­der.

Mackay, in an in­tro­duc­tion to the for­mal con­sul­ta­tion, clearly set out that he was not look­ing for in­sti­tu­tional change for change’s sake. “There are cur­rently ex­cel­lent ex­am­ples of fund au­thor­i­ties col­lab­o­rat­ing on in­fra­struc­ture projects in Scot­land,” he said.

“We look to 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.”

The stakes are not just fi­nan­cial. They are also

po­lit­i­cal. And hu­man: around 400,000 Scots are in the cur­rent 11 schemes. The SNP has al­ready seen at least one cen­tral­is­ing project – the na­tional po­lice force – be­come a po­lit­i­cal foot­ball. A sin­gle scheme – al­ready re­ferred to by some as Pen­sions Scot­land – would have to en­dure un­prece­dented scru­tiny over its de­ci­sion-mak­ing, not least on whether its in­vest­ments were eth­i­cal.

Even more pool­ing of funds to pay for na­tional projects could thrust coun­cil pen­sions on to the po­lit­i­cal front­line. “There is a risk pen­sions would look like a piggy bank for politi­cians,” said one source.

So po­lit­i­cal in­sid­ers – if not pen­sion­ers and the gen­eral pub­lic – seem wise to this po­ten­tial haz­ard. That may ex­plain why Mackay and the Gov­ern­ment are tread­ing care­fully. In­formed sources say the Fi­nance Sec­re­tary and his team have no firm view on the fu­ture shape of lo­cal gov­ern­ment pen­sion funds. They are await­ing the out­come of the con­sul­ta­tion, which closed last month.

An in­de­pen­dent body, the Pen­sions In­sti­tute, is col­lat­ing re­sponses. Its find­ings will go to an ob­scure body, the Scot­tish Lo­cal Gov­ern­ment Pen­sion Scheme Ad­vi­sory Board, some­time this spring. The board, made up of coun­cil­lors and trade unions, will then re­port back to Mackay. But bat­tle lines are al­ready drawn.

The evan­ge­list

SI­MON Wat­son is lead­ing the charge for a na­tional scheme. He is a Uni­son or­gan­iser and, among other things, one of the trade union­ists rep­re­sent­ing fu­ture and cur­rent pen­sion­ers on the ad­vi­sory board.

He sees “Pen­sions Scot­land” as an op­por­tu­nity to get bet­ter re­turns from more eth­i­cal in­vest­ments and still boost the real econ­omy with jobs-cre­at­ing in­fra­struc­ture. That is a lot of bang for your coun­cil pen­sion buck. Wat­son said he thought Gov­ern­ment and lo­cal gov­ern­ment was tak­ing re­form se­ri­ously.

“We were con­cerned there might be a strong view of peo­ple look­ing af­ter their own back­yards,’’ he said, “to keep their own schemes for the sake of it rather than the greater good. But there is a wide va­ri­ety of views.”

He added: “Be­cause of the state of pub­lic-sec­tor fi­nances, there is an over­whelm­ing case for merg­ing the funds and the wider ben­e­fits that will give to spend­ing and ser­vices. “We hope Mr Mackay will look along those lines.” Bet­ter per­for­mance for pen­sion funds is fis­cally sig­nif­i­cant. Wat­son reck­ons im­prove­ments in re­turns could of­fer aus­ter­ity-hit lo­cal au­thor­i­ties the chance to pay less in em­ployer con­tri­bu­tions. Even a mod­est drop in such pay­ment could help coun­cil bot­tom lines. In 2016/17 they paid nearly £1bn into schemes.

Wat­son reck­ons too many peo­ple – in­clud­ing pri­vate funds man­agers and ad­vis­ers – are tak­ing a cut out of pen­sions as things stand. So a cen­tral fund, he be­lieves, would be more ef­fi­cient, with more in-house ex­per­tise on ev­ery­thing from emerg­ing mar­kets eq­uity funds to Scot­tish prison con­struc­tion.

But it is not just the pen­sion funds that need more ex­per­tise, said Wat­son. Pub­lic bod­ies need to be bet­ter at pitch­ing. He said: “There is an ‘ask’ of the Scot­tish Gov­ern­ment to co-or­di­nate bet­ter the in­vestible op­por­tu­ni­ties.

“A na­tional pen­sion fund would still have to get due dili­gence done. Most of what would come from the Gov­ern­ment would be rel­a­tively low risk. Slightly lower re­turn than some of the more high-risk op­por­tu­ni­ties. The Forth Bridge might have been an op­por­tu­nity. If there was an in­crease in coun­cil hous­ing, that might be an op­por­tu­nity too. Or more road build­ing, or busi­ness parks to de­velop new in­dus­tries.”

Uni­son, like other unions and some cam­paign­ers, has a prob­lem about where some of its pen­sions are cur­rently in­vested. “Peo­ple pay­ing into the funds have an eth­i­cal view,” he said. “If rel­a­tively small funds are look­ing at eth­i­cal in­vest­ments they tend to be very con­ser­va­tive about it.

“They tend to say ‘oh, no’, if some­thing is a slightly higher risk. So the err on the side of cau­tion, not mak­ing the best op­por­tu­ni­ties of eth­i­cal in­vest­ments. We think a sin­gle fund would give greater ex­per­tise in that.”

Front­line view

RICHARD McIn­doe is not con­vinced that big is beau­ti­ful. Or more eth­i­cal. And he runs Scot­land’s largest coun­cil pen­sion fund, the mighty Strath­clyde, worth around £21bn, in­clud­ing a bil­lion al­ready in in­fra­struc­ture.

McIn­doe is no en­emy of the unions but he stressed that they do not need to worry about pen­sions, which are un­der­writ­ten by coun­cils and so will be paid how­ever badly the funds re­form. He said: “There is a mis­match of risk. If you start us­ing the pen­sion fund to pro­mote cam­paigns in a po­lit­i­cal way, who pays the costs if it goes wrong? It is the lo­cal au­thor­i­ties’ side. Not the trade union mem­bers.” A na­tional fund, he sug­gested, “would give unions a lot of in­flu­ence with much less reper­cus­sion”.

Strath­clyde, as the big­gest fund, has taken the big­gest heat on its in­vest­ment de­ci­sions. Should it have money in fos­sil fuels? Or arms firms? Or cig­a­rettes? All three are im­por­tant parts of the Scot­tish econ­omy. McIn­doe be­moans what he calls “a lack of pro­por­tion­al­ity” in crit­i­cism.

He said: “Part of the trade union ar­gu­ment is that you can cre­ate a big­ger fund and it would have more

Be­cause of the state of pub­lic sec­tor fi­nances, there is an over­whelm­ing case for merg­ing the funds and the wider ben­e­fits that will give to spend­ing and ser­vices

in­flu­ence. You can pretty much have the same in­flu­ence by just jointly sign­ing a let­ter. You have still got the same num­ber of shares whether two pen­sion funds own them or one. So it is a bit of a hol­low ar­gu­ment.”

Strath­clyde was one of the big in­sti­tu­tional in­vestors which late last year forced Royal Dutch Shell to link ex­ec­u­tive bonuses to car­bon tar­gets (“The ex­ec­u­tives,” smiled McIn­doe, “will be all right”). His fund also cham­pi­oned the liv­ing wage. Like Wat­son, he thinks this makes busi­ness as well as eth­i­cal sense. But he is not try­ing to change the world?

“We are an ac­tive in­vestor,” he said. “An ac­tivist is slightly dif­fer­ent. But we play an ac­tive role.”

McIn­doe has been watch­ing events in Eng­land. He has not been im­pressed. “Be­cause they have been forced to col­lab­o­rate with each other, be­cause they have been go­ing through a process of very hur­riedly get­ting to­gether, it has been chaotic and we have kept out of it.”

Strath­clyde, which is ad­min­is­tered by SNP-run Glas­gow City Coun­cil, has made a for­mal sub­mis­sion to the re­view. Es­sen­tially, it echoes McIn­doe’s view that size is not ev­ery­thing. It said: “Merg­ing in­vest­ments is cer­tain to in­volve a con­cen­tra­tion of risk. A full merger of Scot­tish funds might have slightly in­creased prob­a­bil­ity of suc­cess. But size is no guar­an­tee of suc­cess, and the im­pact of fail­ure would be very sig­nif­i­cant.”

The big­gest po­ten­tial down­size? A “con­cen­tra­tion of risk”, said the fund.

It added: “A full merger of Scot­tish funds could in­crease in­vest­ment in in­fra­struc­ture, but this would de­pend on the in­vest­ment strat­egy of the merged fund and those man­ag­ing it. How­ever, merg­ing the funds sim­ply to achieve more in­vest­ment in in­fra­struc­ture, which is not a pri­mary pen­sion fund ob­jec­tive, would be a per­verse de­ci­sion.”

Strath­clyde, mean­while, wants to keep coun­cil pen­sions in coun­cil con­trol – even if in re­al­ity only 11 of Scot­land’s 32 lo­cal au­thor­i­ties have ad­min­is­tra­tive power over the funds. It said: “At the ex­treme, merger into one fund would be likely to break the di­rect link be­tween the scheme and lo­cal gov­ern­ment by tak­ing the fund out of lo­cal gov­ern­ment con­trol.”

Strath­clyde is big. So big McIn­doe does not con­sider in­vest­ments of un­der £10m. Yet he stresses that big funds can do badly. Bri­tain’s two largest, Univer­si­ties Su­per­an­nu­a­tion Scheme and the British Tele­com Pen­sion Scheme, man­age about £50bn each. Both have fund­ing deficits of more than £10bn.

So which Scot­tish pen­sion fund does best? McIn­doe laughs. That, he said, would be tiny Orkney.

Small is beau­ti­ful

SCOT­LAND’S small­est lo­cal gov­ern­ment pen­sion fund is also the coun­try’s most suc­cess­ful, at least in terms of fund­ing. A pri­vate fund runs Orkney’s fund, which has around £300m un­der man­age­ment. It makes great re­turns. But it in­vests noth­ing in in­fra­struc­ture. Why? Be­cause, it says, there are no op­por­tu­ni­ties on its scale.

In a for­mal re­sponse to the cur­rent con­sul­ta­tion, it said: “The prin­ci­pal im­ped­i­ment to in­vest­ment in in­fra­struc­ture for small funds is the lack of suit­ably at­trac­tive in­vest­ment op­por­tu­ni­ties that are pack­aged in a man­ner that makes them easy to ac­cess.”

It added: “If there were a suit­able in­vest­ment ve­hi­cle that of­fered the pen­sion fund a route into in­fra­struc­ture in­vest­ment with an ap­pro­pri­ate re­turn for the level of risk, that might be per­sua­sive.”

Like Strath­clyde, Orkney does not like the prin­ci­ple of re­form­ing pen­sion funds to squeeze out more money for Gov­ern­ment projects. That, it said, “could be a hugely costly mis­take”.

It added: “Those charged with stew­ard­ship of the pen­sion schemes re­quire to in­vest the funds for which they are re­spon­si­ble to earn the max­i­mum re­turn pos­si­ble for the level of risk taken. Just as in­vest­ments in arms, frack­ing, fos­sil fuels etc may be con­tro­ver­sial, if they are on bal­ance the best in­vest­ments to meet the ob­jec­tives of pen­sions funds then that is where pen­sion funds are in­vested.”

Orkney’s take­away? If Gov­ern­ment wants pen­sions money, then it should put to­gether some wrap­pers.

Back in Glas­gow, McIn­doe con­ceded his fund would be will­ing to team up with smaller ones, open­ing up projects to smaller stakes. That, he said, would be “ab­so­lutely fea­si­ble ... and de­sir­able”.

Work­ing to­gether

OVER in Ed­in­burgh, the Loth­ian Fund is al­ready co-op­er­at­ing, with neigh­bour­ing Falkirk, Fife and the Bor­ders and even North­ern Ire­land. Be­tween them, these funds have put some £20m into in­fra­struc­ture.

Un­like Strath­clyde and Orkney, it is very keen on a na­tional fund, on a vol­un­tary ba­sis. Why? Be­cause it be­lieves gov­er­nance would be cleaner and costs lower.

Loth­ian al­ready has an in-house in­vest­ment team, the only one of its kind, and a model for the kind of cen­tral fund Uni­son wants. The fund’s for­mal re­sponse echoes Si­mon Wat­son’s con­cerns about mas­sive hid­den costs in the pen­sion sys­tem.

It said prof­its to pri­vate fund man­agers and ad­vis­ers could be as high as £90m a year. Cur­rent ac­count­ing rules, it said, mean fees are un­der­re­ported. Its con­clu­sion? As much as £70m in fees could be saved a year by tak­ing ex­per­tise in-house.

It said: “The lack of trans­parency of in­vest­ment fees and gen­eral lack of com­pa­ra­bil­ity of other as­pects of the pen­sion schemes hin­ders pol­i­cy­mak­ers.”

The ad­van­tage of a sin­gle fund would, it said, be a “greater pro­por­tion of as­sets be­ing man­aged in-house. “Fur­ther, the ben­e­fits from ini­tial sav­ings will com­pound over time”.

Trans­parency fear

MORE­OVER, Loth­ian is con­cerned about the trans­parency of de­ci­sion­mak­ing too. Some crit­ics are con­cerned that ex­ist­ing struc­tures con­tain a con­flict of in­ter­est be­tween funds and their ad­min­is­tra­tions.

But Loth­ian’s take is that many of the peo­ple who over­see funds, in­clud­ing coun­cil­lors, do not know what they are do­ing.

It said: “Gov­er­nance is also in­ef­fi­cient. In the re­gion of 150-180 peo­ple are in­volved in the pen­sions com­mit­tees, many with lim­ited knowl­edge and ex­pe­ri­ence of pen­sion mat­ters.”

Its for­mal re­sponse to con­sul­ta­tion sug­gests col­lab­o­ra­tions and pool­ing of funds could raise even more is­sues over ac­count­abil­ity.

“It wants a be­spoke gov­er­nance sys­tem for a na­tional fund. Why? Partly be­cause it wants to guard against what it called a po­ten­tially in­creased risk of cen­tral gov­ern­ment in­ter­fer­ence.

That haz­ard was cited by al­most ev­ery source con­tacted by The Her­ald on Sun­day, in­clud­ing those in Gov­ern­ment.

Merg­ing the funds sim­ply to achieve more in­vest­ment in in­fra­struc­ture, which is not a pri­mary pen­sion fund ob­jec­tive, would be a per­verse de­ci­sion

If even a frac­tion of the wealth a new merged fund would have at its dis­posal was in­vested in in­fra­struc­ture, it could pay for the equiv­a­lent of the Queens­ferry Cross­ing many times over

Orkney’s fund is the small­est in the coun­try, but it’s also the best­per­form­ing. Lit­tle won­der, then, that there is no real en­thu­si­asm there for a merged fund

Newspapers in English

Newspapers from UK

© PressReader. All rights reserved.