The chancellor wants to roll the dice using council pension funds’ assets.

 Has anyone told him about  Surrey County Council’s pension fund used to build Blightwells in Farnham?

If you were a casting director searching for the perfect actor to fill the role of a gambler, Jeremy Hunt would probably not be the first person who comes to mind.

A straight-laced bank manager by all means, but hardly the sharp-suited, trilby-donning Marlon Brando character in Guys and Dolls, singing Luck be a Lady Tonight as he rolls the dice. Indeed, the whole point of Jeremy Hunt’s chancellorship is that he can be trusted with the public finances, or can he?

 While Brando’s character stands only to lose $1,000 a piece to his fellow gamblers in the classic Hollywood musical, in real life, our Jeremy is potentially asking council pension funds to place a multi-billion pound bet using money designed to help pay the pensions of some of the lowest paid workers in the public sectors.

Some councils, including ‘Your Surrey’, have already used the staff pension fund. Think back to the 57m it invested in the Blightwells scheme in Farnham. Twenty-three years after it was mooted, it still hasn’t opened, and the developerCrest Nicholson is reaching out across the country, appealing for businesses to set up shop there.

Let us explain.

 Mr Hunt has unveiled what the Treasury is calling his Mansion House reforms. It is a package of pension changes he said could unlock an extra £75bn for high-growth businesses.

As part of this, the government wants to see the Local Government Pension Scheme “funds and pools doubling their current allocation into private equity, with a total ambition of 10% investment allocation, as part of a diversified but ambitious portfolio”.

The idea is that the LGPS will invest more of its money in “high-growth, innovative technology companies,” whose success will boost the UK economy and increase returns for the pension funds. Such investments offer high potential returns but also high risks.

The Treasury press release about the Mansion House reforms included 17 supportive quotes. None came from LGPS practitioners.

The reason may be that council pension funds exist for one reason: to pay the pensions of their 6.4 million members. Their investment decisions should be guided by their judgement about the best way to achieve this, rather than diktats from the central government, whatever their motives.

Indeed, the recent triennial valuation showed that many council pension funds are well funded, and some now want to reduce the amount of risk in their portfolio rather than increase it. For example, East Sussex Pension Fund is considering reducing its private equity exposure, the opposite of what Jeremy Hunt is urging.

It was an issue that came up frequently at last week’s LGC Pension Insight Symposium in Stratford upon Avon.

One poll asked delegates about the government’s aim for investing 10% of LGPS assets in private equity. A complete 85% agreed,

“this is money to pay small amounts of pension to six million beneficiaries.BACK OFF, GOVERNMENT”.

In contrast, only 15% believed “the government sees the LGPS as a ready cash pile, and it is reasonable to want to make best use of it for the UK”.

Phil Triggs, tri-borough director of Treasury and pensions at Westminster City Council, drew an analogy with the start of austerity in 2010 when councils were encouraged to be more commercial as their government funding was slashed and borrowed to invest in solar farms and town centre regeneration, among other things.

Fast-forward 13 years, and it has not always worked out for the best, as the residents of  Woking could attest. As Mr Triggs said, the government

“doesn’t have a good track record on this, encouraging either local authorities or their pension funds down a particular route”.

And some in the LGPS certainly see a contradiction in the government’s approach to increasing LGPS investment in private equity.

For the past eight years, the government’s flagship reform of the LGPS has been pooling, which sees the 86 pension funds transfer assets to eight pooling organisations to invest on their behalf. A central justification has been that economies of scale would reduce fees paid by pension funds.

And not long ago, there were suggestions the Treasury wanted funds to ditch expensive active management of their assets for passive management because it would reduce their fees.

 Matt Dawson, strategic investment manager at Westminster City Council, says the government is asking pension funds to invest in

“The most expensive, most exotic asset class imaginable”. The proposal to invest 10% of LGPS assets in private equity is, he said, “the exact opposite of the prudential code that you have to adhere to with all of your council investments”.

The government is consulting on this proposal over the summer and other significant proposals to reform the LGPS. It is doubtful to force pension funds to invest 10% in private equity, but strongly encourage them to do so instead.

It should be very wary about doing even this. While the LGPS’s £369bn can be used to do a lot of good – whether it be funding social housing and green infrastructure or influencing the behaviour of banks and fossil fuel companies – its first and foremost priority must be investing to achieve the returns needed to pay pensions. Central government demands about how it allocates its assets run counter to this.

In Guys and Dolls, Marlon Brando was lucky: by the film’s end, he had won his bet and got the girl. In contrast, it will be many years before council pension funds know how the script the chancellor attempts to write will end.

For their sake, we must hope that, in the song’s words, Luck really was a lady for Jeremy Hunt.