James Graham: Right-thinking councillors must take back control of local government pension funds

James Graham is a Senior Researcher at Prosperity Institute.

The Local Government Pension Scheme (LGPS) is not the most exciting subject. Yet we must force ourselves to care about it: collectively, these pensions amount to one of the largest pools of capital in the world, with over £400bn under management. For context, the recent foreign buyout of a quarter of Covent Garden cost £570m, 0.1 per cent of the LGPS pot.

LGPS money is purportedly invested to ensure the payment of future pensions. To do this it should be allocated with one goal in mind: the maximisation of returns. Anything else is a violation of the fiduciary duty, and of the fiscal principles that underpin conservatism and prosperity.

Yet currently, every local government pension has adopted net-zero goals within their portfolio. Whilst much nebulous guidance has been issued, this is not a legal requirement. Councils are making an active choice to elevate an environmental, political objective over and above fiscal prudence – and their obligations to pension scheme members.

Kemi Badenoch has said that reaching Net Zero by 2050 would bankrupt Britain. It follows that reaching Net Zero in local government pensions will bankrupt councils and risk the retirement of millions.

It is a mystery, therefore, that even Conservative pension schemes remain wedded to this goal. The practical consequence is that rather than investing to achieve the highest returns, trustees are investing to achieve “green outcomes.”

Local councils do not attempt to hide that their overarching aim is leveraging the £400bn they manage to achieve Net Zero. They openly admit it in their annual accounts, their stewardship reports and their responsible investment policies.

Let’s zoom in on Suffolk County Council. Its pension fund has £3.2bn under management, with 60,000 scheme members reliant on it for their retirement. The fund is chaired by a Conservative councillor and it aims to achieve Net Zero by 2050.

Its latest annual report says that 14 per cent of the portfolio is allocated to a ‘Climate Aware fund,’ and another 7.5 per cent is allocated to a ‘Low carbon transition fund.’ This is a clear example of politicised investment priorities.

(It is also worth noting that both funds exclude any investment in the defence industry. This is a common theme across many local government pension schemes and runs counter to Britain’s stated aim of rebuilding its defence industry.)

In Suffolk’s ‘Path to Net Zero’ policy document, we are told that when considering investing in a company, the pension fund has a list of requirements it must consider. These include the company’s “overall ESG scores and direction of travel,” and “the organisation’s path to net zero.”

This is more malicious than simply prioritising secondary goals over investor returns; Suffolk is admitting that they use pension money to pressure private companies into pursuing political outcomes.

Other councils are more explicit. For example, Lincolnshire council (which manages £9bn) says it will use its pension funds to impose its beliefs upon private companies. Its voting guidelines state that it will use its shares to vote against companies at their AGMs if they are not “sufficiently addressing the impact of climate change.”

This includes reducing scope three emissions, meaning emissions caused by third parties that are indirectly linked to the company in question. In other words, companies that the pension fund does not invest in will ultimately be forced to comply with their edicts.

One industry that Lincolnshire council brings in for special scrutiny is the beef industry, linking it to deforestation. Curious, for such an agricultural county. According to their guidelines, any company that has high exposure to the beef industry must take action to address the risk of deforestation within their operations and supply chains.

Lincolnshire pension’s voting policy does not just force private businesses to comply with climate goals. Like most LGPS pensions they also use their shares to advance mandatory diversity requirements – but alas, this is a separate story for another day. However, it compounds the fact that financial returns are not the priority.

Local government pensions are managed by a committee which is almost always chaired and controlled by councillors of the majority party. This means that councils can change course, and they should.

Conservative-controlled pension funds are being used to force private companies to adopt policies that contradict the Conservative Party’s very own policies, from defence to energy. They are also risking the financial security of scheme members – and thus, given that LGPS consists of defined-benefit schemes, putting the taxpayer at risk, for they will ultimately have to pick up the bill if and when the funds underperform.

It is probable and understandable that many local councillors are unaware that the fiduciary duty has been abandoned. The default assumption is that pensions are managed with financial returns in mind and there is no doubt that in practice it is the local government blob that is responsible for much of the irresponsible investment.

It is time for right-minded councillors to latch onto this issue, and seize the £200bn under their control as a tool for growth and to act as fiscal conservatives should.