Reform’s sovereign wealth pitch risks raiding pensions not reviving growth
Reform’s Richard Tice’s plan to consolidate local council pension schemes fundamentally misunderstands the nature of fiduciary duty, says Tim Focas
Behind the rhetoric of Reform’s proposal to consolidate local council pension schemes into a near £500bn sovereign wealth fund lies a major misunderstanding of what these pension assets are and who they exist to serve.
Local Government Pension Scheme funds are not spare cash sitting idly on the sidelines. They are fiduciary pools built to pay the pensions of millions of current and former public servants. Trustees are legally required to act in the best financial interests of those members. That duty is not optional and it cannot be overridden by wider industrial policy goals. Basically, the money belongs to pensioners, not to the state.
Turning these assets into a sovereign wealth structure risks blurring that boundary. If investment mandates were nudged toward domestic projects that do not clearly maximise risk adjusted returns, trustees could face legal challenges. Even the perception of political direction can be enough to trigger scrutiny. Markets and courts alike take pension independence very seriously, and for good reason.
There is also a practical problem. Pension schemes invest to meet predictable long-term liabilities. They need steady cash flows and diversified exposure across global markets to balance risk. A sovereign wealth approach tends to concentrate capital into domestic energy, infrastructure or technology projects. Thus creating two clear mismatches.
Concentration risk
The first is concentration risk. Overweighting the UK economy means tying pension outcomes more closely to the same economic base that ultimately funds local tax revenues and employment. When growth slows, and let’s face it GDP is not exactly skyrocketing at present, both sides of the balance sheet suffer at once. This is why diversification exists precisely to avoid that trap.
Then there is liquidity risk. Large infrastructure investments can lock up capital for decades. Pension schemes, however, need the flexibility to rebalance portfolios as members age and funding positions can change quickly. Reduced liquidity may look manageable in good times, but it can become a constraint when market conditions shift.
Supporters of the idea often argue that scale is the missing ingredient. In reality though, the UK has already moved down that path. Local Government Pension Scheme assets have been consolidated into investment pools such as Border to Coast and Brunel to reduce fees and access private markets. Creating another sovereign vehicle risks duplicating existing structures rather than adding new investment firepower. More layers of governance raise a simple question of who ultimately decides where the money goes? Trustees, central government or external managers? Without clarity, investors will assume political risk is creeping into the system.
There is also a broader economic misconception at play. Successful sovereign wealth funds usually grow out of persistent fiscal surpluses or commodity windfalls. Norway’s oil fund and Singapore’s Temasek invest excess national savings. Sadly, the UK does not currently enjoy that luxury. Repackaging pension assets merely reshuffles investments that already exist as opposed to creating fresh capital.
In fact, a politically branded sovereign fund could have the opposite effect to the one intended. If government backed capital becomes a dominant buyer of domestic assets, private investors may worry that returns will be driven by policy rather than fundamentals. Some may step back, leaving projects more dependent on public balance sheets and potentially less efficient overall.
If all this wasn’t enough, global markets are keeping their beady eyes open for any signal about property rights and institutional independence. Any hint that pension savings could be redirected for political objectives risks undermining confidence. Higher perceived policy risk can translate into higher borrowing costs and weaker investment flows from abroad.
When presented in abstract, Richard Tice would be hard pressed to find anyone who is against the ambition to boost British growth. But transforming local council pension schemes into a quasi-sovereign wealth fund risks turning long term retirement savings into a policy tool is not a free lunch. It introduces legal uncertainty, portfolio mismatches and reputational risk at a time when the UK needs coherent thinking. Far from unlocking growth, it may end up discouraging the very investment it seeks to attract.
Tim Focas is head of capital markets at Aspectus Group