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

Photo: Getty
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Who will win in Manchester Gorton?

Will Labour lose in Manchester Gorton?

The death of Gerald Kaufman will trigger a by-election in his Manchester Gorton seat, which has been Labour-held since 1935.

Coming so soon after the disappointing results in Copeland – where the seat was lost to the Tories – and Stoke – where the party lost vote share – some overly excitable commentators are talking up the possibility of an upset in the Manchester seat.

But Gorton is very different to Stoke-on-Trent and to Copeland. The Labour lead is 56 points, compared to 16.5 points in Stoke-on-Trent and 6.5 points in Copeland. (As I’ve written before and will doubtless write again, it’s much more instructive to talk about vote share rather than vote numbers in British elections. Most of the country tends to vote in the same way even if they vote at different volumes.)

That 47 per cent of the seat's residents come from a non-white background and that the Labour party holds every council seat in the constituency only adds to the party's strong position here. 

But that doesn’t mean that there is no interest to be had in the contest at all. That the seat voted heavily to remain in the European Union – around 65 per cent according to Chris Hanretty’s estimates – will provide a glimmer of hope to the Liberal Democrats that they can finish a strong second, as they did consistently from 1992 to 2010, before slumping to fifth in 2015.

How they do in second place will inform how jittery Labour MPs with smaller majorities and a history of Liberal Democrat activity are about Labour’s embrace of Brexit.

They also have a narrow chance of becoming competitive should Labour’s selection turn acrimonious. The seat has been in special measures since 2004, which means the selection will be run by the party’s national executive committee, though several local candidates are tipped to run, with Afzal Khan,  a local MEP, and Julie Reid, a local councillor, both expected to run for the vacant seats.

It’s highly unlikely but if the selection occurs in a way that irritates the local party or provokes serious local in-fighting, you can just about see how the Liberal Democrats give everyone a surprise. But it’s about as likely as the United States men landing on Mars any time soon – plausible, but far-fetched. 

Stephen Bush is special correspondent at the New Statesman. His daily briefing, Morning Call, provides a quick and essential guide to British politics.