Pension Blog 1: It's time to make some use of pension billions in our regions
This is the blog version of my Birmingham Post column printed last Thursday December 9th 2010.
The biggest, most powerful financial investors in Britain are probably not who you think they are.
Forget hedge funds, insurance companies or investment houses in the banks.
How about school cleaners, bin men and women, care workers, social workers or local government officers?
I say that because UK local government pension funds administered by local government for its non-teacher and non-firefighter employees are actually the surprise powerhouses of investment.
You might estimate that they have a few million quid up their sleeves eventually to pay out peanuts pensions to low-paid workers. Wrong.
How about assets totalling ÃÂ£160billion?
My research of every local government pension fund in the UK has some startling findings about where wealth is generated and what happens to it.
The schemes' annual reports and accounts for 2009-2010 have been coming out this last month or so. Collating the information in these I can reveal that as at 31st March 2010, the grand total of all 99 local government pension schemes assets is ÃÂ£161,602,952,000.
In the Global Investment world this is usually seen in US dollars, so the wealth of our local government workers in investment around the world's financial centres is $251billion.
Combined, this would make the UK Local Government savers fund the 3rd biggest (public or private) pension fund in the world!
In the international league table of Pensions funds (the P&I/Towers Watson 300), only the mega funds of the Japanese government's $1trillion pension fund and the Energy-rich Norwegian Government employee pension scheme would outrank it.
A consolidated fund could have bailed out Ireland all by itself last week and have hardly noticed a dent in its asset base.
It could take on a third of the US Treasury bond market currently held by the Chinese economy.
The problem is precisely that it is split into a mosaic of 99 separate funds. Nobody is really aware of its sheer size and potential power: perhaps least of all the ordinary local government employees who contribute to it every month.
Each fund is managed and governed separately. Each being charged by investment managers in the four corners of the global financial world and in London. Each with its own well-remunerated cadre of accountants, advisors, consultants and lawyers.
When you take even a little sliver of a slice of that pie it can mean an annual fortune for some. Last year the funds paid out collectively some ÃÂ£340million in fees to investment folk. Approaching ÃÂ£1.3billion over the last 5 years has gone in fees from the savings of humble local government workers.
Nice work if you can get it.
The Birmingham, Black Country and Solihull authorities have sensibly combined into one (very well-managed and efficient) fund and has ÃÂ£8.07billion in assets available.
The Midlands (West and East) combined has ÃÂ£23.44billion to invest. The North of England has ÃÂ£47.84billion combined (Greater Manchester with ÃÂ£10.44billion). Scotland and Wales have ÃÂ£21.61billion and ÃÂ£8.51 respectively. Northern Ireland has ÃÂ£3.56billion.
Three immediate reform areas arise:
1. The obvious need to combine these 99 funds into one regionally-based mega-fund to end the inefficient and dissipated multiplication of funds . The combined fund would become a real global investment player with tremendous influence and power. I'm afraid the gravy train for the financial pinstripe brigade has to hit the buffers.
2. Placing control of these funds in the hands of trustee boards directly elected by their active contributors and pensioners, not councils. These funds are the savings of individual local government employees. They are not the savings of local government itself and why councillors are running them is a mystery.
3. Returning and re-investing this massive wealth back to the regions and communities which create this savings wealth in the first place through a new investment infrastructure.
Without doubt the most important reform is that these funds should be part of a new regional investment strategy which I believe would give as good a return to the funds as the current overbalanced rationale.
The shocks of the recent market crashes (and bouncebacks) have been accentuated further in these funds because they were loaded up too much by way of investment in big global corporate equities and commercial property-based equities the world over.
Legislation allowed and encouraged this spread as well as currency speculation, derivatives, hedge funds, hedge funds of hedge funds, loaning out shares for shorting, bond markets and international infrastructure investments.
These approaches have become too great a feature of these funds. Last year fingers were very badly burned. ÃÂ£27billion was wiped off the assets in a single year. A bounceback occurred to cover it this year - but what of next year?
We have to reform the legislation to limit this approach in favour of one where the pension funds must invest massively more directly into the regions of the UK.
This means there also has to be a new regional financial and investment infrastructure in place in tandem with the pension fund reform.
This is to allow regional financial pathways for these funds to inwardly invest in the regions from which their wealth comes.
The current model appears more like a plughole down which regional wealth disappears: first into The City and thence to the four corners of the financial planet.
The National Public Pension Fund (which other public sector pension funds could opt into) would be the driver of regionalising wealth and investment out of London and the South East.
We need investment in West Midlands manufacturing business and municipal authorities by the pension funds. Regional business equity and venture capital investment, housing, transport and other infrastructure projects should be the first port of call for regional pension funds.
This needs a regionalised local authority bond market based in each region, local municipal banks, local stock exchanges, local corporate bond markets, local venture capital funds and unit trusts of regional business and other equity funds.
Obviously this would in any event also better enable regional inward investment per se, beyond pension funds.
It's time to repatriate the wealth of our regional economies in a long-termist investment policy which benefits our national and regional economies. And that growth will bring better long-term wealth to the pension funds themselves - and, of course, their pensioners.
The BBC/Robert Peston Coverage of John Ralfe's estimate of the Local Government Pension Scheme ÃÂ£100billion deficit 'Black Hole' today is interesting but deliberately extreme to make a perfectly valid point. The deficit claim is a little ridiculous, and deals only with England, by the way. It somewhat irrelevantly assumes that effectively the pension funds would have to pay out liabilities tomorrow, assumes a short-term company accounts based valuation standard, and also assumes the last 3 years' relatively awful market performance continues: none of these makes sense to a pension fund liability valuation.
That aside, Ralfe makes some very good points that these funds are overreliant on unsafe, unpredictable worldwide equity markets and should be brought back to basics. My point exactly.
Picture credit: Birmingham Cityscape - firstname.lastname@example.org