Anthony Hilton: Scandal of Chancellor George Osborne's pensions meddling

Sleight of hand: George Osborne

Jonathan Brady/PA Wire

11 February 2016

Gordon Brown has gone down in history as the Labour chancellor who raided the nation’s pension schemes when he abolished the tax-free status of dividend income. But even in his wildest dreams, Brown would surely not have sought to get away with what Chancellor George Osborne is currently quietly putting in place.

The grand plan of today’s Chancellor is to take effective control of the nation’s local government pension schemes so he can direct them to invest in his pet infrastructure projects. In doing this, he crosses a line no British government has dared to cross before. It is thinly disguised state direction of investment.

The Government’s scheme is clever because it is Osborne’s usual mix of sleight of hand concealed beneath a veneer of overdue and necessary reform. The Local Government Pension Scheme (LGPS), provider of pensions for five million people or 12% of the nation’s workforce, is one scheme but the investment policy is scattered among 89 different bodies. The attraction of this is local accountability. The downside is that the multiple doubling-up of actuaries, administrators, auditors, portfolio managers, investment consultants and the rest is ridiculously expensive.

Note, however, that the LGPS is a funded pension scheme, meaning the money — some £210 billion of it — has come from the contributions of employees and employers, not directly from the taxpayer. It is different from the unfunded schemes of the armed services and the police, where the pensions will be paid directly out of taxes.

Bizarrely, given it was somebody else’s money, there was widespread support for Osborne at the Conservative Party conference last year when he announced that he would ask the 89 funds in the scheme to transfer their resources into a few much larger “investment pools”. He got away with it probably because he claimed, and few disagreed, that such rationalisation could save hundreds of millions of pounds in costs.

Since then, and with a deadline of this month, those who run the schemes have been working hard to satisfy the Chancellor’s desire for the myriad funds to be repackaged as six pools of at least £25 billion each. Resistance is thought to be futile. They are in no doubt that if they do not do it voluntarily, he will consider changing the law to force them.

But there is a second arrow in the bow. With a political flourish, Osborne has branded these new pools as British sovereign wealth funds although they are nothing of the sort. Sovereign wealth funds are formed by and belong to governments such as Norway, which have saved some of their oil tax revenues for future generations. Sovereign funds belong to the nation. But these pension funds do not belong to the nation — they are the statutory assets of the five million past and present local government employees.

But that seems an irrelevant detail to this Chancellor in a hurry. This is where it gets messy because he has also said that these new pools will be expected to invest 25% of their assets in infrastructure, and again it is clear from the draft regulations that those running the funds will have to do what he wants. A document published in November by the Department for Communities and Local Government, entitled Investment Reform Criteria and Guidance, spells this out. It says in part: “The draft regulations include a provision for the Secretary of State to issue guidance... Authorities would then need to have regard to that guidance when producing their investment strategy... The consultation process proposes to introduce a power for the Secretary of State to intervene in the investment function of an administering authority where it has not had sufficient regard to guidance published by the Secretary of State.”

These are deep waters. It makes sense for pension funds to invest in infrastructure to the extent that these assets can be expected to deliver a reliable long-term income stream that matches the funds’ needs. But this does not apply to all funds all the time, and because such assets can be hard to sell in a hurry, even those it suits should not buy too much.

Nor does it mean pension funds have the skills to build the stuff. Buying completed infrastructure is one thing; building it from scratch means taking on all the risks of planning and construction and cost overruns. That requires a quite different set of skills and exposes the funds to a wholly different level of risk.

But the even more basic point is that it is no business of government how pension funds invest. Under the British system, trustees and investment managers have by law to put pension fund money where they believe it will deliver the best returns for members. They may not always get it right but that is what they are trying to do.

It is a fundamentally different thing for government to decide that this money should in future be used to meet the infrastructure needs of the nation.

It is utterly invidious to have government nudging the funds in the direction of what will inevitably be its latest pet schemes, which it cannot get funded by anyone else. Think Osborne kowtowing to the Chinese, then when the Chinese say no, passing the project to the pension funds. And if the pension funds then lose money, well that’s the risk of investment.

Government has no business bouncing pension funds into paying for stuff that, unpressured, they would never have looked at. While too many City bodies have remained silent on the issue, some senior figures are appalled. Philip Jones, recently retired as an investment manager for the London Pensions Fund Authority, says he is totally disgusted that a Conservative Government should be planning “the appropriation of private pension fund savings for central government purposes”.

It is, he says, “totally scandalous. No pension pots are safe if this is allowed to happen”.

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