Pension bosses assault Rachel Reeves’ megafund plans over fears of presidency ‘cash grab’

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Pension bosses have attacked Rachel Reeves’s plan to merge local authority pension funds and get them to invest in projects like housing, fearing the government is trying to grab their cash after years of prudent investing.

Dozens of local government pension funds, which manage a total of about £360bn for 6.5m local authority workers and pensioners, will be asked to merge their assets in a bid to grow them faster under plans unveiled last month by the Chancellor.

The Treasury also wants the 86 authorities to set aside a percentage of their funds for investment in the local economy, suggesting that a 5 per cent target would mean about £20bn of investment for Britain’s communities.

Angus Thompson, a councillor and chair of North Yorkshire’s £4.6bn fund for local authority workers, says he is concerned that his fund will be “mortgaged” and used by the government for its own ends.

“I think it’s all just an excuse on the part of the government to try and get their hands on the money one way or the other,” he said.

His fund has grown in size considerably since being underfunded in the wake of the financial crisis, and now boasts a large surplus. It has been allowed to pick its own investments and has £640m, or 16 per cent, more in assets than it needs to ultimately pay its members.

He credits much of the fund’s success to being able to pick active funds, which select companies its executives think will grow quickly and buy shares in them. About a sixth of the capital is in one particular investment fund, which more than doubled in value in the last five years.

This roaring success means pension funds like his have little to gain by being lumped in with poor performers: “The idea that we should have all our money in pools at the moment, to me, is just stupid.”

This so-called active management style has been challenged of late by passive funds, which simply mimic stock market indexes and cost a lot less to manage. But picking a good fund can mean better returns for members.

His concerns are mirrored by other advisers and managers in the industry, who spoke confidentially with The Independent and who argue that prudent pension funds should not be shunted together with poor performers just to do the government’s bidding. They have also questioned the idea that bigger funds are more efficient.

North Yorkshire does pool some of its funds with other authorities, “but we still have money outside,” he adds.

Cllr Thompson, a Conservative, is also concerned about being asked to invest in local projects, particularly in infrastructure and housing.

Ms Reeves said in a recent speech that merging the funds “could unlock around £80 billion for investment in private equity, including exciting growth businesses and in vital infrastructure projects including transport, energy and housing projects here in the UK.”

Cllr Thompson said: “Persuading pension funds to invest in housing, I think, is just a non-starter” because of few builders and local services to construct and support them.

At the same time, the huge building programme needed to catch Britain up with the homes it needs – his local authority alone needs to build more than 4,000 a year – means his fund is unlikely to make a dent in the demand unless it is to sell much more profitable investment to finance the project.

Here is where many players in local pension funds sing from the same hymn sheet. They have what is known as a fiduciary duty to invest pension savers’ money in places it will get the best results. This is often shares in companies, and the best results in the last decade have come from abroad, particularly the US.

Local investments could mean other projects outside housing, Cllr Thompson said, but he would still be worried about poor performance.

It is also understood that the North Yorkshire fund invested several decades ago in property projects including a warehouse in Essex and a shopping centre in Nottingham, which ended up being a “disaster” for the fund, according to a source, leaving managers much more reticent about direct investment in local infrastructure and property.

He has a duty to get the best returns for his pensioner members, who work for the council, “and I don’t think that there’s any evidence that us investing in local infrastructure will enhance those returns in any shape or form”.

John Gray, chair of Newham Council’s £1.7bn pension fund and a Labour councillor, says he is also wary of housing investments, since the return will be lower than investing in shares. While Mr Thompson wants to invest in more expensive so-called active funds, Mr Gray favours passive funds, because they are cheaper.

Pooling is likely to push funds one way or the other, since choosing a mix defeats the point – cheap passive funds are made more expensive-looking if added to active pools, whereas active funds’ returns are diluted if passive funds are added.

He is also more in favour of pools, since they can help bring costs down for members. Lower fees in the long term can make a big difference for savers.

“Rachel said she’s not merging the individual funds, it’s the assets, fine, but if the asset allocation investment risk is being taken out of the hands of the local authorities, while the liability for paying pensions remains with us, and we’ve got no control over how this money is invested, then there will be a pushback in that, and it will be a problem.”

But he agrees on the fiduciary duty point – his savers must come first.

“If the government wants to do something for the government’s own political agenda, no matter how sympathetic I am to that agenda, it’s not going to work. This has got to be what’s good for the local government pension scheme,” Cllr Gray says. “They have to bear the cost for all going horribly wrong.”

A Treasury spokesperson said: “The Mansion House pension reforms will increase investment in infrastructure, boost people’s pension pots and grow the economy.

“We are working with industry to ensure our pension funds take advantage of size and scale to deliver more productive investment and better outcomes for savers.”

But shadow work and pensions secretary Helen Whately cautioned: “The Government must heed these warnings and not risk pension returns with their ideological pet projects.

“There‘s a case for pension reforms – but if Rachel Reeves thinks forcing pension funds to invest locally will compensate for her anti-growth budget, she should think again. The last thing pensioners need is poorly thought-through reforms on the back of Labour’s broken promises.”