ESG, stewardship and Kay Review feed into six planned UK ‘wealth funds’

Assets of 89 local government pension schemes are being pooled

The UK government has started the process of pooling the assets of 89 local government pension schemes to create six “British Wealth Funds” – and wants them to use Professor John Kay’s review into long-termism to help develop ESG and stewardship policies for the new pools.

In October, UK Chancellor [Finance Minister] George Osborne announced plans to pool around £193bn (€274bn) in local government pension scheme assets to create six pooled funds, with at least £25bn of scheme assets each, to boost infrastructure development. At the time, Osborne said the creation of ‘British Wealth Funds’ would revolutionise infrastructure investment.

This week, as part of Osborne’s autumn statement, guidance on creating the pooled funds has been released by the UK government. It has asked schemes to come forward with proposals for pooling their funds, and launched its criteria for applications.

Part of the criteria will be the demonstration of how ethical, social and corporate governance policies will be handled by the pool; and how authorities will act as responsible, long-term investors through the pool, including how the pool will determine and enact stewardship responsibilities. The document says schemes will want to consider the findings of the Kay Review when developing their responsible investment and effective stewardship proposals. It also cites the Financial Reporting Council’s UK Stewardship Code as good guidance.

The document also states that the Law Commission has recently clarified that as part of fiduciary duty schemes may take purely non-financial considerations into account.In reaction to this the government says it will issue guidance to authorities to clarify that such considerations should not result in policies which pursue municipal boycotts, divestments and sanctions, unless put in place by the government.

Local government pension schemes are already in the process of forming partnerships. The London Pensions Fund Authority has developed a £10bn asset and liability management partnership with Lancashire County and a £500m infrastructure investment joint venture with Greater Manchester.

However, the plans have prompted concern. Speaking to Public Finance, CIPFA chief executive Rob Whiteman said: “We need to be extremely cautious that the local government pension fund investment returns are not compromised by thoughts of compulsory investment in local or regional infrastructure from which the returns may be much less certain.”

Alongside the guidance, the UK government has this week launched a consultation on so-called “backstop” legislation that will require local government pension schemes that do not come forward with “sufficiently ambitious proposals” to pool their assets with others.

Local Government Pension Scheme (LGPS) authorities must submit their initial proposals by February 19 2016. Refined and completed submissions are expected by July 15. The LGPS is currently organised through 89 separate local government schemes and a closed Environment Agency scheme.