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Pooling local authority pension funds risk political interference, warns MP


Pooling too many local authority pension scheme funds may lead to "political interference" and poor investment decisions, an MP has warned.

Mark Field, who represents the Cities of London and Westminster constituency, outlined his opposition to plans that would see 34 separate London local authority pension schemes merged into one. He said that tax payers' money could be put at risk as a result of such arrangements.

"There is a broad risk to all of us that politicians of whatever political colour might be tempted to use the large investment funds to pay for economically unsound infrastructure projects," Field said in a speech at Westminster Hall earlier this week. "Local council tax payers will end up footing the bill if we get that wrong."

He said London's local politicians and Mayor may be able to exert "partisan political influence" on how pooled local authority pension scheme funds are invested, with a particular risk being that the funds are used to invest in "uneconomic" infrastructure projects not favoured for investment by the private sector.

"With politicians under increasing pressure to deliver sustainable growth, it is all too feasible that the economics will be rigged to justify the investment, with public pension funds siphoned into politicians’ pet projects or ones the private sector has deemed too risky – the High Speed 2 railway project springs to mind," Field said.

The Conservative MP said that he was not against the idea of using local Government pension funds to invest in public projects and added that there were other ways in which to drive efficiencies in local authority pension schemes.

"Some local authorities are moving their funds into a form of joint working," Field said. "Cambridgeshire and Northamptonshire county councils have merged their pension fund administration operations, and the Society of London Treasurers is leading discussions on ways of pooling certain investments and securing a better arrangement for fees that are paid for investment opportunities where scale obviously plays a part. Local authorities that use collective investment vehicles can still use smaller-scale managers for other investment opportunities in a way that is appropriate for their funds."

"Closer to home, one of my local authorities, the City of Westminster, works on a tri-borough basis with the royal borough of Kensington and Chelsea and the London borough of Hammersmith and Fulham. As a collective, they have managed to address a whole range of procurement issues—well beyond the issue of pensions—while improving resilience and developing staff expertise. Importantly for the three councils and for local ratepayers, there has been no merging of responsibility or loss of local control," he added.

Public sector pensions law specialist Christopher Berkeley of Pinsent Masons, the law firm behind Out-Law.com, said that investing in infrastructure can form part of a diversified investment strategy deployed by those running local authority pension schemes.

"Investment in infrastructure can, if the right projects are selected for investing in, provide a guaranteed, stable income at decent returns," Berkeley said. "The investments are not without risks, however, as infrastructure projects can go wrong at the construction stage and assets invested in infrastructure carry the risk of illiquidity. The long-term value and risks must be carefully assessed by pension scheme managers before a decision is taken to use the funds to invest in infrastructure."

"One way that local authorities could mitigate the risk and take advantage of infrastructure investment is by collaborating with other local authorities with similar pension scheme benefit structures and liabilities. That way some of the money from each scheme can be pooled to obtain cost efficiencies in relation to that investment. In addition, the risk of illiquidity could be mitigated if one authority takes on another’s stake in the future, if the selling authority’s investment strategy changes, for example. As part of a diversified investment strategy, these pooling arrangements can open up opportunities for local authorities to experiment with infrastructure investment whilst mitigating some of the risk," he added.

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