Pooling pension funds makes perfect sense

Far from the hysteria about "Granny tax II", London's pension investment plan can't come soon enough

Pension funds and infrastructure investment have enjoyed a recent revival in policy discourse. Last month Prime Minister David Cameron used a major speech on the economy to discuss infrastructure, ‘the magic ingredient in so much of modern life.’ In Budget 2012 Chancellor George Osborne announced a new Pension Infrastructure Platform. Yesterday they were the talk of the town in London.

The proposal to pool the pension funds of London boroughs and to invest these assets through a new infrastructure vehicle is good news both for the public purse and good news for the essential upgrades – to transport, utilities and communications – that the capital requires. However, a new debt vehicle will only go so far. To drive economic growth London councils should consider more fundamental reforms to the pooling of both finance and risk.

Pension funds have long time horizons. This means that they are well placed to invest in the infrastructure that is crucial to economic growth but will not realise immediate returns, such as new transport connections. In fact, there is a near perfect match between pension funds' appetite for long term assets and the need for long term financing of infrastructure.

Although underdeveloped in the UK the investment model has been pursued abroad; Canadian public pension funds are amongst the most active backers of infrastructure in the world. London councils are reportedly modelling their new approach on the Ontario Municipal Employees’ Retirement System (OMERS).

The scale of the OMERS model encourages collaborative working. This has provided the stability required for Ontario investment managers to build up management expertise. In the UK, councils that collaborate on investment decisions – through arrangements like those in place in Greater Manchester or under discussion in the Leeds city region – can raise far more money than those that work alone. In the absence of a clear national strategy for growth such local prioritisation and investment certainty is crucial.

OMERS holds CAD $55 bn in assets which makes it slightly smaller than the proposed £30 bn London fund. As of December 2010 OMERS had committed 15.5 per cent of its total portfolio to infrastructure. Its target allocation of 21.5 per cent dwarfs the investment planned by London council’s: 7.5 per cent of pension fund assets or £2.25 bn.

OMERS invests through its Borealis infrastructure vehicle. Borealis was established in 1999 and has built up sufficient expertise to run a varied infrastructure portfolio. London councils should consider establishing a similar independent vehicle so that decisions are based on the best business case for investment and the fiduciary duty of trustees, rather than political short-termism.

The relatively small scale of the Canadian infrastructure market means that OMERS has invested in international markets in order to meet its portfolio target. London boroughs may prefer to invest solely in projects in and around the capital, such as Crossrail or the proposed extension of the Northern Line to Battersea. However, prioritising local investments will undermine portfolio diversity. The boroughs will have to take a more holistic view of infrastructure for local economic growth.

London council’s may want to consider channelling local investments through a revolving investment fund (RIF). This would provide a vehicle through which councils could co-operate on the use of existing capital spending allocations and prudential borrowing. Greater Manchester has recently established a £1.2 billion RIF and agreed a city deal with the government that gives councils the opportunity to "earn back" up to £30m a year of tax for the growth it creates through infrastructure investments. This could include both corporate and income tax and demonstrates that Government is willing to consider potential funding opportunities that go way beyond the current plans for local business rate retention.

London boroughs could look to negotiate a similar deal, assessing infrastructure investment not only on stand-alone returns but on how they will underpin the development of London’s businesses.  If they succeed in this they could well have found a "magic ingredient" for economic growth. They may even have a few ideas to offer the Canadians.

London boroughs are planning to pool their pension liabilities. Credit: Getty

Joe is a senior researcher at the New Local Government Network

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Air pollution: 5 steps to vanquishing an invisible killer

A new report looks at the economics of air pollution. 

110, 150, 520... These chilling statistics are the number of deaths attributable to particulate air pollution for the cities of Southampton, Nottingham and Birmingham in 2010 respectively. Or how about 40,000 - that is the total number of UK deaths per year that are attributable the combined effects of particulate matter (PM2.5) and Nitrogen Oxides (NOx).

This situation sucks, to say the very least. But while there are no dramatic images to stir up action, these deaths are preventable and we know their cause. Road traffic is the worst culprit. Traffic is responsible for 80 per cent of NOx on high pollution roads, with diesel engines contributing the bulk of the problem.

Now a new report by ResPublica has compiled a list of ways that city councils around the UK can help. The report argues that: “The onus is on cities to create plans that can meet the health and economic challenge within a short time-frame, and identify what they need from national government to do so.”

This is a diplomatic way of saying that current government action on the subject does not go far enough – and that cities must help prod them into gear. That includes poking holes in the government’s proposed plans for new “Clean Air Zones”.

Here are just five of the ways the report suggests letting the light in and the pollution out:

1. Clean up the draft Clean Air Zones framework

Last October, the government set out its draft plans for new Clean Air Zones in the UK’s five most polluted cities, Birmingham, Derby, Leeds, Nottingham and Southampton (excluding London - where other plans are afoot). These zones will charge “polluting” vehicles to enter and can be implemented with varying levels of intensity, with three options that include cars and one that does not.

But the report argues that there is still too much potential for polluters to play dirty with the rules. Car-charging zones must be mandatory for all cities that breach the current EU standards, the report argues (not just the suggested five). Otherwise national operators who own fleets of vehicles could simply relocate outdated buses or taxis to places where they don’t have to pay.  

Different vehicles should fall under the same rules, the report added. Otherwise, taking your car rather than the bus could suddenly seem like the cost-saving option.

2. Vouchers to vouch-safe the project’s success

The government is exploring a scrappage scheme for diesel cars, to help get the worst and oldest polluting vehicles off the road. But as the report points out, blanket scrappage could simply put a whole load of new fossil-fuel cars on the road.

Instead, ResPublica suggests using the revenue from the Clean Air Zone charges, plus hiked vehicle registration fees, to create “Pollution Reduction Vouchers”.

Low-income households with older cars, that would be liable to charging, could then use the vouchers to help secure alternative transport, buy a new and compliant car, or retrofit their existing vehicle with new technology.

3. Extend Vehicle Excise Duty

Vehicle Excise Duty is currently only tiered by how much CO2 pollution a car creates for the first year. After that it becomes a flat rate for all cars under £40,000. The report suggests changing this so that the most polluting vehicles for CO2, NOx and PM2.5 continue to pay higher rates throughout their life span.

For ClientEarth CEO James Thornton, changes to vehicle excise duty are key to moving people onto cleaner modes of transport: “We need a network of clean air zones to keep the most polluting diesel vehicles from the most polluted parts of our towns and cities and incentives such as a targeted scrappage scheme and changes to vehicle excise duty to move people onto cleaner modes of transport.”

4. Repurposed car parks

You would think city bosses would want less cars in the centre of town. But while less cars is good news for oxygen-breathers, it is bad news for city budgets reliant on parking charges. But using car parks to tap into new revenue from property development and joint ventures could help cities reverse this thinking.

5. Prioritise public awareness

Charge zones can be understandably unpopular. In 2008, a referendum in Manchester defeated the idea of congestion charging. So a big effort is needed to raise public awareness of the health crisis our roads have caused. Metro mayors should outline pollution plans in their manifestos, the report suggests. And cities can take advantage of their existing assets. For example in London there are plans to use electronics in the Underground to update travellers on the air pollution levels.

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Change is already in the air. Southampton has used money from the Local Sustainable Travel Fund to run a successful messaging campaign. And in 2011 Nottingham City Council became the first city to implement a Workplace Parking levy – a scheme which has raised £35.3m to help extend its tram system, upgrade the station and purchase electric buses.

But many more “air necessities” are needed before we can forget about pollution’s worry and its strife.  

 

India Bourke is an environment writer and editorial assistant at the New Statesman.