Pension fund democracy
The challenge from Reform
Now that the dust has settled on last week’s local elections in the UK, it is worth trying to think through what this might mean (if anything) for pension fund investment and reform.
A quick recap - Reform (our populist/hard Right party for non-UK readers) performed very well. It achieved the highest vote share (estimated to be 30%) of any party, won the most seats (677 out of about 1,600), took control of ten councils and is the largest party on several others, won two mayoral elections (and was close in others) and won a parliamentary by-election, taking a seat off Labour.
The other big winners were the Liberal Democrats who took control of two councils and look to be winning over centrist and liberal-conservative voters put off by a Brexity and Reform-like Conservative Party (which was the big loser). The Greens did OK, but not much more than that. Labour did very badly, second only to the Conservatives.
The council seats that were up this time were largely in suburban or rural areas, which probably flatters Reform a little, but I’m not sure that they wouldn’t do well in some urban areas too. This was undoubtedly a very good night for Reform.
I know lots of people will be hoping and expecting that these new Reform councillors will be useless and that at least some will be exposed and forced to stand down. I’m sure there will be a bit of that. But equally Reform is trying to professionalise and soften its edges. In future I would expect more of their people to look like their candidate for the Runcorn and Helsby by-election than their candidate for the West of England mayoralty. And it’s likely that a non-trivial number of Reform candidates will be former Conservatives with experience of campaigning and governing at local level.
Also, those newly-elected councillors, and newly-controlled councils, are obviously not just numbers on a board. Reform now has real political power at a local level, something its predecessor UKIP never really cracked. The big question is how they will use it. Already Reform has talked about setting up mini DOGE units to cut waste. And Nigel Farage, Richard Tice and others have made clear the kind of thing they are thinking about.
“I would advise anybody who’s working for Durham County Council on climate change initiatives or Diversity, Equity and Inclusion or… things that you go on working from home, I think you all better really be seeking alternative careers very, very quickly.
"We want to give council taxpayers better value for money. We want to reduce excessive expenditure. We want to find out who the long-term contracts are signed with and why, and reduce the scale of local government back to what it ought to be.”
Tice:
Reform control the Mayoralty and County Council in Lincolnshire with myself as local MP
If you are thinking of investing in solar farms, Battery storage systems, or trying to build pylons
Think again
We will fight you every step of the way
We will win
“We are going to have a Lincolnshire Doge. We are going to ensure that we get rid of diversity officers because amazingly Lincolnshire County Council is now Reform controlled. That is a historic moment.”
Anyone with the shallowest of knowledge of local government will know that it is not overflowing with cash and wastefully spraying resources about. Local government has been gutted since the financial crisis. I think we can be sure that Reform councillors will find it rather challenging to save lots of money by cutting diversity officers. Nonetheless they are going to want to make an impact. It is possible that this will extend to the LGPS.
In my last post I had a quick look at the possible impact on LGPS funds and pools. To recap, just looking at political control of administering authorities, LGPS Central has the potential to be the most affected. There are eight LGPS Central pension fund members, so eight administering authorities. Three of these are now controlled by Reform, and they are the largest party in two more.
Staffordshire (LGPS Central) - Reform control (40 out of 64 seats)
Derbyshire (LGPS Central) - Reform control (42 out of 64 seats)
Nottinghamshire (LGPS Central) - Reform control (49 out of 62 seats)
Worcestershire (LGPS Central) - NOC, Reform largest party (27 out of 57 seats)
Leicestershire (LGPS Central) - NOC, Reform largest party (25 out of 55 seats)
Of the remaining three funds, Shropshire went to Liberal Democrat control, Cheshire (West Cheshire and Chester) is Labour-controlled and doesn’t have elections till 2027 and the same goes for West Midlands (Wolverhampton City Council). And West Midlands is the big player in this pool.
Looking at other pools, Border to Coast and Access also now have two Reform controlled administering authorities and LPP has one.
Lincolnshire (Border to Coast) - Reform control (44 out of 70 seats)
Durham (Border to Coast) - Reform control (65 out of 98 seats)
Warwickshire (Border to Coast) - NOC, Reform largest party (23 out of 57 seats)
Kent (Access) - Reform control (57 out of 81 seats)
West Northamptonshire (Access) - Reform Control (42 out of 76 seats)
Lancashire (LPP) - Reform control (53 out of 84 seats)
I’ve included the seat totals just to give a sense of how secure this control is. In the four years between elections all kinds of things can happen - councillors stand down, or defect or even die. Reform doesn’t look likely to lose control of councils like Kent or Durham any time soon, but places like Staffordshire and West Northamptonshire could be more vulnerable. That said, defections etc can affect any party.
In terms of LGPS governance, typical practice is for the governing party to chair the pension committee and have the most seats. That would mean nine LGPS funds chaired by Reform. If they were to try to influence the approach of those funds, and, by extension, the LGPS pool they participate in what might we expect?
It’s possible that Reform nationally or locally aren’t that interested. Lots of the people I work with are nerds who think control of pension funds matters. Most people don’t think like that, and councillors are a subset of ‘most people’. In my experience few councillors think that chairing the pension committee is a big/important/status role.
If that’s the case, perhaps not much changes. I think first and foremost Reform councillors will want to try and reduce cost. So we might see pressure to reduce or eliminate expenditure on anything that they don’t think adds value. The extent to which there is more to be squeezed out here is an open question and Reform councillors, like the Conservatives they have just replaced, may find that they are broadly happy with how things are. They might even sympathise with some of the government’s agenda, if it means investing more in the UK.
The risk, in relation to Responsible Investment, is that these councillors are not likely to be very sympathetic to ESG issues. If this is combined with the cost-cutting agenda I fear that they will look at expenditure in this area, both at fund and pool level.
Given the comments of the national Reform leadership, it would not be a surprise to see particular scrutiny of investment in renewables. Given that this can often be found in the private markets allocation, it would be easy for Reform to get up a story about the ‘millions’ being spent on fees to invest council taxpayers’ money in renewable energy infrastructure that is ‘useless when the wind doesn’t blow or the sun doesn’t shine’. Yes it’s nonsense but you can see how it could pan out.
Secondly, they might also decide they want to shift fund and pool policy on certain topics. I don’t think they are going to be pushing for funds to take a stronger voting and engagement position on climate change or diversity. Think about BP’s AGM this year. Do we think a Reform-led council would be clamouring to get its pension fund to vote against the BP chair and be public about it because of the shift in the company’s transition strategy?
A second order impact could be that experienced opposition councillors, and indeed council officers, want funds to hold back from public statements on ESG topics for the time being as a defensive tactic. Sleeping dogs and all that…
I don’t have a good sense of how likely any of this is to happen, but bear in mind that that the anti-ESG wave that has rocked Responsible Investment in the past few years started from the Right in the US using the influence of pension funds where they have control to push asset managers. And Farage is no stranger to US Right politics.
So, what to do?
As I’ve written before, part of the problem with the Right critique of ESG/RI is that some of it is not wrong. There is something in the claim that it is an elite project that doesn’t have a clear democratic mandate. One of the various problems with the attempt to respond to this challenge with “RI is just good risk management” is that this strays further into the terrain of RI as an objective and technocratic endeavour where non-experts have no right to play. In my opinion this shrinks the potential constituency for RI.
I see risks too in Labour’s approach to the LGPS that would weaken the partial democratic control that has existed to date. To be clear, member representation and voice in the LGPS is far weaker than in equivalent funds in other countries, but locally-elected politicians do still have some sway. The current direction of policy would reduce this substantially while doing nothing (as far as I can see) about member representation.
I fear we will end up with a handful public sector asset managers that are notionally accountable to the underlying funds but in practice functionally independent. And over time the staff will become largely indistinguishable from their private sector counterparts, which in turn will change their internal culture. Ultimately it obviously won’t make sense to have half a dozen of these managers, so we’ll end up with one big quasi public sector investment fund.
I can imagine some people looking at the rise of Reform in local government thinking that all of this is a good thing, because we don’t want them mucking about with the money. But all we will really have achieved is creating a big national fund that then becomes the subject of national political interest. If Reform ever did lead or become part of a government you can bet they would be interested in pension fund investment then. This, then, is just a public sector version of the limited vision of ‘getting BlackRock to do things’ - it’s fine when you are making the weather, but when it’s your opponents…
I don’t have a good solution, other than trying to broaden the base. It is too late for a more ‘bread and butter’ approach to RI to be developed in a way that would quickly address the challenge from Reform. But I still think it is a worthwhile endeavour and it might at least complicate anything Reform tries to do.
More fundamentally, I strongly believe that any Left/progressive/choose your label approach to these sorts of topics has to reject a technocratic model. At a principles level, it’s just wrong - this terrain is laden with politics, always has been, always will be. That is why we need member/beneficiary representation and control. To be clear in whose interests the funds should be run and to ensure that at least some understanding of the outside world is brought in. I much prefer a model of fund governance where some of those with some power remain profoundly shocked by how much those we employ to invest our pensions, or run companies, are paid.
At a more basic tactical level, why would any left-of-centre political party create a centre of economic / financial resource and power and then cede control of it to the private sector? Surely this would be an historic mistake.
It is not too late to change course, but it does need to happen quickly. Let’s hope the threat from Reform provides a jolt.