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LGC Briefing: The evolution of Osborne's pensions legacy

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Commentary on the latest in local government pension investments

Elected mayors may be on the wane and some believe the collapse of the North East’s devolution deal places a question mark over the future of the Northern Powerhouse.

George Osborne’s legacy for local government is under threat, just two months after he was unceremoniously booted out of the Cabinet by Theresa May.

However, one key local government plank of Mr Osborne’s six-year term as chancellor is coming ever closer to fruition. This week’s LGC Investment Summit has been hearing about how the pooling of Local Government Pension Scheme funds’ assets is very much under way and little seems set to stop it.

In the words of Jeff Houston, the Local Government Association’s head of pensions, to the summit, “some things may have changed but it’s not going to make pooling go away”. However, crucially, Mr Houston believes that the “axis” on the future of local government’s pension investments has “shifted” away from the Treasury back towards the Department for Communities & Local Government.

As new communities secretary Sajid Javid has assumed control, Mr Houston said he could detect some “new mood music” from the government. The onus was “less about using [LGPS] money to pay for George Osborne’s latest project”.

There have been concerns raised by some observers that one of Mr Osborne’s key motivations to pool assets was to effectively raid the funds to win investment for new infrastructure, including that needed to make the Northern Powerhouse a reality.

However, this has led to fears that the future pensions provision of the local government workforce could be undermined by investment decisions being guided by political and national economic motives rather than the need to get the highest return.

Mr Houston told LGC the LGPS advisory board had written to Mr Javid’s department to seek government guarantees on the returns from infrastructure projects in which it wants the scheme to invest.

This morning, Bob Holloway, the Department for Communities & Local Government’s head of workforce pay and pensions, confessed to the summit that he was reluctant to speak about pooling in his final few weeks before retiring.

He did, however, say that while ministers remained “very committed to the pooling process”, he predicted that as “real world costs start to feed in, the process of evolution will kick in and things will change”.

Questions remain about the rules surrounding the governance of the new pools and the legal rules by which they will be bound. However, it could be that cultural factors are as important in determining the nature of the pooled system.

Speaking with fund managers at LGC’s event, there was no consensus about exactly where all of the power lies in the new system. While it is hard to see the role of councillors not diminishing, at least to a degree, under the pooling system, there will still be strong elements of local responsibility and democratic input. One elected chair of a pensions committee expressed concern to LGC that the role would have a lower profile under the pooled system, meaning it was more likely to be filled by less able members.

Similarly there is uncertainty about the amount of central staff the pools will take on and about how they will gel with those working for individual funds.

In a presentation to the summit, Gavin Ralston, head of official institutions at Schroders, compared the British pools with government funds of a comparable size in other parts of the world.

The Canadian state of Alberta’s fund, which has a value of £44bn and covers many local authority funds, has a staff of 1,200 and its chief executive earns £1.2m annually

“Their view of the world is that they need to compete with the private sector to get the best people,” Mr Ralston noted.

Meanwhile, the Australian state of Victoria’s £28bn fund has a staff of 80 and chief investment officer remuneration of £440,000.

Asked on the LGC stage about the likely pay of top pool staff, Jill Davys of the London’s Collective Investment Vehicle, said a balance was required.

“People do think that competitive salaries need to be paid but we want to avoid Daily Mail headlines,” she said. “Salaries should be competitive but not City comparable.”

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