IPE Views: The challenge in launching Britain’s non-wealth funds

The creation of eight distinct asset pools by local authority funds in England and Wales is gradually progressing, but, as Jonathan William writes, the funds still resent the government’s rhetorical flourish, as deadlines force participants to complete work to nigh-impossible deadlines

Advocating for the creation of British Wealth Funds sounds fantastic. After all, which country would not wish for £200bn (€273bn) in sovereign wealth, and which government running deficits would not like to use the money to invest in infrastructure? Unsurprisingly, British chancellor of the exchequer George Osborne repeatedly employed the ‘wealth funds’ rhetoric when, last summer, he confirmed the government’s plans to create a small number of local government pension scheme (LGPS) asset pools.

Despite causing great annoyance and concern within the industry, government ministers and spokespeople have continued to refer to the new pooling arrangements as British Wealth Funds, despite the creation of the eight pools – not sovereign wealth funds. Sovereign wealth belongs to a nation, while LGPS assets were put aside specifically to pay retirement income for workers to the UK’s sizeable local government sector. Short of the national government’s advocating the nationalisation of one of the world’s largest occupational pension funds, no sovereign funds will launch when the pools become operational. 

Nevertheless, Marcus Jones, the minister responsible for LGPS reform within the Department for Communities and Local Government (DCLG), this week braved the audience at the Pensions and Lifetime Savings Association’s local authority conference, and once again spoke of British Wealth Funds.

“Half a dozen sovereign wealth funds – god I hate that. There isn’t a single sovereign wealth fund being created.”

Jones spoke highly of the work already underway and apologised for his department’s tardiness in releasing the finalised investment guidelines, which will see the LGPS regulated under the prudent-person principle. The reason for the delay, he said, was the time needed to plough through 23,000 responses, largely brought on by campaigns over government plans to police what it perceives as politically motivated divestment decisions among local authority funds.

But Jones’s largely positive speech could not mask the continued annoyance at the use of British Wealth Funds. Fiona Miller, head of pensions at Cumbria County Council and representing the £35bn Border to Coast Pensions Partnership, remarked that the pooling agenda had been set almost as a challenge. “Half a dozen sovereign wealth funds,” she said of Osborne’s challenge. “God I hate that. There isn’t a single sovereign wealth fund being created.”

Annoyance was not limited to the use of imprecise, if soundbyte-friendly, language. Another delegate, Matthew Trebilcock of the £23bn Brunel Pension Partnership, said he and nine of his colleagues across the 10 participating administering authorities had been working significant overtime to meet DCLG deadlines. Trebilcock said they had done an estimated 480 hours of work on pooling over the three weeks previous, in addition to their day jobs at councils.

Mark Wynn, director of finance at the Cheshire Pension Fund and representing the Central Pool partnership, illustrated the challenge facing his pool alone. He noted that the eight participating LGPS were currently running 12 distinct strategies across 214 mandates – with more than 100 equity mandates – all of which had to be examined, for stakeholders to compromise on the best way to reduce complexity as part of the cooperation.

Wynn himself said he was proud of some of the multi-manager strategies his £4bn fund had put in place only a few years ago. But he said that, if the pool were truly to be more cost-effective, sacrifices would need to be made, and managers dropped. He added that, before any responsibility is signed over to Central Pool, each council will need to trust the new organisation fully. “Relationship management will be absolutely key,” he said. “This is going to be a rocky road over the next few years, we know that, and the pool is going to have to say ‘no’. It can’t be everyone’s friend. When it’s asked to implement something, comes up with its own ideas in a constructive way, [then] it needs to start telling some of the funds they can’t have what they’ve always had.”

The emphasis will be on compromise and ensuring the pools’ governance structure is such that, when compromise cannot be achieved, funds can hold their wholly owned pool fully to account. While leaving any pool would always be an option, it should be seen as a last resort because, even if the pools are not sovereign wealth, they are someone’s retirement income and deserve to be managed as professionally as possible.