The minister responsible for councils’ pension investments has said he is not considering further rationalisation of the local government pension scheme.
In an LGC interview, Rishi Sunak said progress has been “good” on the pooling of the 89 individual local government funds into eight pools, which is intended to cut administrative costs and create a larger scale to boost investment into infrastructure projects.
He urged funds to invest at least a tenth of their assets into infrastructure investment.
“We are making progress,” Mr Sunak said. “Of the eight pools, the majority are there already or almost there and there are one or two that are on the way.”
When asked whether the two pools deemed furthest behind could be compelled to merge with another pool if they did not make progress, the local government minister said: “There are no conversations that we’re having that suggest they’re not on the path they need to be on.”
He said he was not supportive of the view that a single, or at least fewer, investment pools would be more efficient.
“We’re already in the middle of a quite major reform, to go from 89 to eight. The important thing now is to make sure that this works. There are £2bn of benefits that I think can come from this set of pooling, and the infrastructure and everything else so let’s make sure we deliver on those benefits before thinking of any future reorganisations.”
Criteria to assess pooling’s success
Mr Sunak confirmed the four criteria that would be used to assess whether pooling was a success:
- “Investment performance net of fees”: the “benefit of pooling is that it should lower fees and hopefully improve investment performance through greater specialisation and scale”;
- Data: “the quality of data and transparency is not where we need it to be… we’re pooling so we want to make sure there’s consistency and comparability of data and the data is transparent, so we can evaluate it in the way we want to”;
- Governance, and;
On the latter criterion, Mr Sunak, who co-founded an investment firm before he became an MP in 2015, pointed out that while internationally most pension funds would invest 10-15% of assets in infrastructure, the aggregate proportion across the 89 local government funds was just 0.5%.
“That difference, if we were to get to say 10[%], the lower end of the international [range], is worth £20bn to us in incremental infrastructure investment. A large chunk of it would hopefully go to the UK. That would be very, very positive,” he said.
Asked whether there could be a formal target on investing a certain proportion of assets in infrastructure, Mr Sunak said: “I don’t think we need to be at that point right now. We are working with the funds that have publicly committed to improving it. Some have put specific targets themselves.”
He urged a “two-way street” in which funds “are doing what they need to” to invest in infrastructure and those requiring capital “are… structuring opportunities in a way that makes sense for pension funds”.
“It’s no good if you’re in infrastructure sitting there and ‘saying no one gives me any money’. You need to be cognisant of the people you are raising money from. What are their needs? Are you structuring in a sense that makes sense for them,” said Mr Sunak. “Hopefully the willingness is there, the pools are coming together. Over time we’ll see how this plays out.”