 Good morning and welcome to the 13th meeting of the committee in 2015. If you wish to use tablet devices or mobile phones during the meeting, please switch them to flight mode as they may otherwise affect the broadcasting system. Some committee members may consult tablet devices during the course of the meeting as we provide papers in a digital format. We have received apologies from Cara Hilton today. Our first agenda item today is to agree to take agenda item 3 in private. Are we all agreed? Yes, thank you. We now move on to agenda item 2. Clare Adamson? Yes, I would like to declare an interest before we move into this agenda item as myself and my husband are members of Strathclyde Pension Fund. Thank you. Any other declarations? Will the coffee please? I would like to declare an interest. I am also a member of the Strathclyde Pension Fund. I am a member of the Fife Pension Fund. I am a member of a local government pension fund, but I am not exactly sure, but my wife is a member of Strathclyde Pension Fund. Thank you for those declarations. The second item is an oral evidence session with two panels of witnesses on our mainstream consideration of the budget strategy phase 2016-17. In this session we will investigate further an issue that we identified in our report to the Finance Committee last December on the 2015-16 budget. That is in the role of local government pension funds investing in the delivery of local capital infrastructure. I would like to start by welcoming our first panel of witnesses who are Chad Doche, director of policy at the Scottish Public Pensions Agency, Barry White, chief executive of the Scottish Futures Trust, Dave Watson, Scottish organiser with Unison Scotland and Peter Morris of the Greater Manchester Pension Fund and head of pension policy at Temside Metropolitan Borough Council. At which point I will declare an interest as a member of Unison Scotland as well. Before we move on to the questions, do any of the witnesses wish to make any brief opening remarks? No, in which case we will move straight on. I wonder if you could give us an indication of the overall investment strategies of local government pension funds and how investment locally in capital infrastructure fits into that situation. Mr Morris, would you like to start off, please? A lot of pension funds will invest about 60 per cent to two thirds of their money in companies and probably up to a third in loans and bonds. Generally speaking, most pension funds invest a relatively small proportion of their money in private equity and infrastructure, and 10 per cent is probably an upper-limiting property. We are very much invested along those lines. One of the reasons is that our pension scheme, the LGPS, is based on an assumption by the Government that it will deliver 3 per cent real returns. One of the few ways in the current environment where you can get a 3 per cent real return is if you expect equities to deliver good returns going forward. At the moment when you have bonds delivering negative real returns, it is really difficult to get anywhere near that 3 per cent. What do we do? We are at the more rare end of the spectrum in terms of our local investments, and it has been growing over time. Our predecessor fund started with a little bit of private equity investment in the 1980s. The same site took responsibility for the fund in 1987, and pretty soon thereafter it started to try and invest locally in property development situations. More recently we have expanded quite a bit our local investment capability capacity and the investments that we are making. In my note, you will have seen that the Greater Manchester Property Venture Fund, which is very much in its name, suggests investing in property development opportunities. We can have invested up to 3 per cent of the fund in that activity. Our investment in housing, which is homes for sale and market rent, has attracted a lot of interest. We are in the first stage of building 240 homes there. We have a local impact portfolio, which again can be investing up to £150 million. We have a variety of means in which we invest locally, but we invest locally on two premises. One is to deliver commercial returns, and secondly is to have some add-on benefits to the area. Mr Dotrey, do you want to talk about the Scottish perspective? The Scottish Government does not hold records on exactly where each of the 11 pension funds invest their money. It might help the committee, and I think that I have referred to this in the paper, to know that there are now new governance arrangements in place, which just came into effect on 1 April, which required there to be a scheme advisory board. The first meeting of that board is tomorrow, and it is going to look at a series of issues. Its work plan, one of those, is going to be on the transparency of where funds are investing their money. At the moment, the Scottish Government does not have a central view of where that money is invested. Mr White, do the Scottish Futures Trust have a view on all of that, and could you benefit from pension funds investing in local infrastructure? I think that Scottish infrastructure and Scottish economy could benefit from a more active investment style from pension funds. I think that the paper from Manchester summed it up, and it is not an either-or question in terms of commercial returns. It is a case of saying, with a proportion of the fund, can you get a double bottom line of both a commercial return and satisfy some local investment opportunities as well? The paper from Unison on housing, in particular, is one of the areas where housing supply with additional investment could be a good opportunity for pension funds and to help the wider economy. I think that there are other areas beyond that, but I think that the opportunity is certainly there. I think that, rightly, the Manchester pension fund, or Greater Manchester pension fund paper, highlights some of the risks in that. There is a capacity and capability point in terms of moving from a more active management of investments rather than doing it through third parties. If you are doing it more hands-on yourself, both the governance and the capacity within the team probably needs to be slightly different than it currently is. How different? I just think that if you are going to start making investment decisions about investing locally, you do need more hands-on expertise. If you do something like the university superannuation scheme, which is headquartered in London, covering all of the UK's universities, they have an infrastructure investment team in-house. Through that team, they have bought stakes in the air traffic service Heathrow Airport and some other investments, but they then put people on the boards of some of those companies as well. Likewise, with some of the big Canadian pension funds, their style very much is to take direct investments rather than go through third-party funds, but then to actively help manage those investments as well. Overall, if you are going to start assessing, for instance, a property transaction or a housing transaction, you do need to have a more hands-on approach than outsourcing and management to a fund where you are monitoring the performance of the fund. I think that there are bigger decisions to be made when you are investing locally. Thank you, Mr Watson. Do you have anything to add? Yes. I suppose that our interests came partly as a result of the new governance arrangement that Chad has just mentioned, but also in negotiating the new pension scheme that comes into force this month, when we saw for the first time an aggregate of where the money was being invested in Scotland. We noticed that almost half the investment at that time was in overseas equities and another quarter was in UK equities and very little in local infrastructure investment. Obviously, our members want to return on the investment to pay their pensions. That is my primary job as a lead negotiator for the pension scheme, but they prefer that investment to be in things that are useful for them and their members. I am also concerned that equity investments were costing a lot of money in hidden management costs, and we have commissioned quite a lot of work in this area. There was another driver to look at a different method of looking at that. As one member put it to me at a meeting, my pension fund invests in Tokyo Underground but does not invest in the Coca-Cola orange that I go to work in every day. That is maybe a simplistic description of it, but it reflects a reasonable local view. That is why I, in conjunction with the Scottish Association of Housing Federation, got together and thought, let us have a look at housing as an example of this and you have got the paper there to look at. However, it is just housing. We wrote the paper on housing to start a stimulated discussion around the area. It did do that to a degree. Now is the time to take that forward with the new governance arrangement. There are some constraints that you will want to explore and I will happily cover those in further questions. Mr Morris, if I could return to you because we have heard that local investment, particularly in areas such as housing, may require more hands-on support within the funds to make sure that the investment is managed wisely. Has that been the Manchester experience? If so, could you give us an example of what additional resources have been required to ensure the delivery of infrastructure projects? Our local investments and property team currently has eight people in it. They are looking after a very small proportion of our fund that will grow up to 5 per cent of fund value. The other 95 per cent is looked at by a team that has one more member of staff in it. We have consciously separated out the local investment team. Obviously, there is an overlap at times that a potential big transaction comes our way. Either way, that is. The scale and demands of local investment, from our perspective, are much greater than looking after other assets. That is because we are more involved. In terms of the nine that are dealing with the other staff, how much money is spent on fund managers to deal with those other investments? Are there any fund managers involved in the delivery of the local investment? For our property venture fund, we have an external manager sourcing, arranging, managing and seeing through the development, albeit it still involves more of our involvement than it does with anything we do on the main fund side. The reason why we do that is that we think we get reward from it. If we get involved in a relatively significant transaction, generally speaking, it involves taking on board representation on the vehicles in which we are managing the investment. We either do the appraisal or, generally speaking, challenge the appraisal much more than we would do in any other situation. We will do that. On the housing, for example, we do for the joint venture vehicle, we do the accounting, we do the administration of the vehicle against something that fits within the activities that we do. I can give more examples of this if you like. What I am trying to get my head around is that we have eight folk dealing with the local investment, nine folk with all of the other stuff. From my experience, although we have a small team of folk dealing with the day-to-day business of the pension fund, often there is a huge amount of outsourcing and payment to others to deal with the aspects of that fund. While you might have eight folk dealing with the local investment and nine folk dealing with the other stuff, it might well be that the costs of overall dealing with the other stuff is much greater because you are using external sources to deal with a lot of that work. That is what I am trying to get my head around. The illustration I will give then is where we are investing in equities and bonds, the cost of that will be, in terms of manager fees, it will be appreciably less than 0.2%. Where we are investing in things like private equity, the sums that go in management there may well be up to 5% depending on the success of the fund. The local investments are going to be more towards the costs associated with private equity infrastructure funds than what they are with investing in companies and bonds. A percentage, have you got any idea? John Wilson, please. Thank you, convener. Good morning. Just to go back to Mr Toddry's opening comments on the answer to your self-convener, the local government pension scheme advisory board was supposed to be established under the new rules that came into effect on 1 April. What I picked up from what you said is the first meeting of that board will take place tomorrow. As far as I am aware, there is no public announcement being made about who the board members are. Could you give an indication of who will make up the board, where they come from and the experience they have? I do not have a list of all the members to hand, but it will be published on our website. It should already be there, SPPA's website. The scheme advisory board is bipartite, so it has employer and it has member or employee representatives. The Scottish Government is represented there by the SPPA with observer capacity, so it is run effectively by employers and members. The member representatives are union nominated. Is that public information at the present moment? I was quite surprised when you announced it, because you were even checking yesterday afternoon to find out who, if there had been an announcement, the only thing that is on the Scottish Government website is that there are discussions taking place about the appointment of the board, but the names of those on the board had not been made public. Is it just to try and get a balance with the Scottish Government representation? No, it is pretty much even representation between employers and their representatives by elected members and members who are represented by trade unions. The Scottish Government does not have a formal seat at the table. We are there with observer status. Other people can attend as well. Advisors can come along to meetings as well. I was also interested in the comment that you made about the Government not holding any information in relation to where the current pension investments are taking place. There has been no analysis done on that, and I thank Mr Watson and Unison's work that they have done on analysing where the investments are currently taking place. Do you envisage that one of the major tasks of the new advisory board would be to find out where local government pension funds are being invested? Before you have that information, you need that information to know whether or not you can advise the type of investments that are taking place. That would be deemed as appropriate by the advisory board. I would answer that in two ways. It is perhaps not a major task of the scheme of advisory board. The scheme of advisory board is obviously going to have to look at a number of things. Its predecessor, which was called SlogPag, which is the Scottish local government pensions advisory group, agreed a draft work plan, or effectively to-do list. It is not quite yet a work plan, so tomorrow's meeting will start to take place. I have already indicated that one of the areas that has to be looked at is the transparency of where investments from the various funds are going. The Scottish Government has taken the view that we set out the framework in which the scheme operates. There are 11 funds and they have delegated responsibility to manage within those regulations, but absolutely the scheme advisory board will want to know where monies are being put. That raises the other issue that Mr Watson raised about pension funds, the Strathclyde pension fund investing in the Tokyo rail network at the same time failing to invest in local traffic and transport infrastructure in and around Strathclyde. The issue would be whether the advisory board would be looking to give a clearer direction to the pension fund investment bearing in mind the fiduciary duties that will apply to those pension funds. What is the possibility of investing in infrastructure projects in their own region or in Scotland? First of all, the Scottish ministers have been very clear about that. They can see the advantages of investment being made in infrastructure, whether it is the local government pension scheme or any other pension scheme. The scheme advisory board will need to consider, based on the information that it gets on where the money is going and to do something like what the committee is doing here, to look at examples of where things have worked well and case studies about where opportunities might be taken. I have mentioned Mr Watson a couple of times. I wonder if Mr Watson would like to respond to that. I am surprised that he would love to. It is bipartisan and a rotating chair, so there are seven councillors and seven trade union reps on the new scheme advisory board. The paper that we are jointly taking to the first board meeting tomorrow includes a work plan for the new scheme advisory board. High up on that work plan is to address both the transparency of information in relation to investments but also consistency. At the moment, there are really only two ways that people can look at how this information is brought together on a Scottish-wide basis. One, it is done at the time of valuations, so the GAD in the main of the government advisory department for the negotiations on the new scheme and each for the trying to valuations tend to pull together that data so you get a nice chart and you can see where it goes. That is always a little bit out of date in fairness. The second way of doing it is freedom of information requests, which are done by ourselves and by journalists and others. Frankly, it is not the best way to pull together information on what is £26 billion or £27 billion worth of investment. It is a huge driver or should be a huge driver in the Scottish economy. I think that there is a broad understanding that we need to explore ways of having some consistency and transparency so everyone can see where that money is being invested. Then, I think that you have got that, you then start to have a discussion about what sort of advice and guidance is necessary to shift the balance of investment to those areas that both employers and the trade unions would wish to see it go to. I think that we should be very careful. I do not think that we should criticise pension funds for investing in the Tokyo subway or pick on just the Tokyo subway. If that is a good investment, I think that that is a perfectly valid thing for pension funds to do. I think that it is just about a mix in a portfolio and allocating part of their fund for local investment but managing that carefully would be a good thing to see happening. I do not think that we should be drawn in to investing in the Tokyo subway. If that is a good investment and helping the fund to be successful, I think that it is really important. I think that the transparency point, one of the great challenges in transparency is that there are lots of infrastructure funds with lots of local government pension fund money in it. Those infrastructure funds are quite reluctant to declare who is invested in them because that is their customer base and they do not want other infrastructure funds tapping up their money. We know, for instance, in Dumfries and Galloway hospital, the new raw infirmary, which is an NPD project. Some of the sub-debt for that project was put in by Aberdeen Asset Management, which is their infrastructure fund. From the paper, Strath Clyde has said that they are one of the investors in that fund. We would not necessarily have visibility of that as part of the procurement team working with the health board for that project. I am delighted that they are part of it, but equally that Aberdeen Asset Management fund will invest all across the UK and even abroad. From that point of view, getting absolute transparency is more difficult, but what Manchester has done very well is saying, up to a certain limit of our fund, we will look to do some local stuff, 5 per cent, but manage that carefully. That added transparency and added focus is a really helpful aspect. I thank Mr White for that response. NPD is a debate for another day, as he will note from my recent parliamentary questions on the returns of some of the funding of NPD projects. In relation to the existing 11 local government pension funds that exist in Scotland, how many of those pension funds are investing in local infrastructure or Scottish-wide infrastructure? The reason for the debate is to try to find out how best we can utilise those resources that are sitting there. The Tokyo Underground is a good example to highlight that, while the underground system in Glasgow needs major investment, what would be perceived as, as Mr Watson said, Scottish trade union members' money is being used to invest in improving transport structures in Japan, but there seems to be a reluctance to use that funding to invest in infrastructure projects and transport projects in Scotland. Anyone has an answer to how many pension funds there are? I do not specifically answer that question. As I understand it, I struggle with the underground in Glasgow that is publicly owned. Therefore, the reason that pension funds will invest in Tokyo subway will be because there is a private element of finance going into that. Investment into the underground in Glasgow is a question of two things—public powers of borrowing, given that it is a public asset, and how you repay that investment so either the fares have to go up or somebody else has to pick up the tab for the borrowing. Even if any of the pension funds that are here today wanted to invest in the underground in Glasgow as currently structured, they could not, unless the Scottish Government or Glasgow City Council were to issue bonds to invest in it. That would be a municipal bond rather than an infrastructure-backed investment. Because of the public nature of much of our infrastructure in Scotland, there are limited opportunities for pension funds to invest directly into a lot of our transport infrastructure as an example. Before we get sidetracked here, does anyone have the answer to the original question about how many pension funds in Scotland are actually investing in local infrastructure? It is interesting that the example of the public versus private investment that Mr White gave is part of the dilemma that we might be facing. How do we square the circle in terms of ensuring that pension funds can be used for public projects? I will look at the recent example in the past decade, but the investment that took place in the building of new schools throughout Scotland by local authorities and the investment regime that was used in those circumstances did not involve public money and private partnerships. The PFI example was used in PPP to deliver those skills. How do we get to a position where we can utilise those pension funds to deliver public projects? If you are saying that the difference is that Tokyo is a private rail network and yet the Glasgow subway is publicly owned, how do we get that situation where we can utilise what might be a useful investment if you are saying that it is difficult because of the dilemma between public versus private investment? A couple of quick answers to that. There is a bit about borrowing powers in the Smith commission, where the Scottish Government could issue bonds and pension funds could buy those bonds. That is one part. Within the complex classification rules, one of the only ways to get pension fund investment into public infrastructure is through NPD, PPP-type structures with using project finance. That is what the rules and accounting rules say that you can do. I would therefore say that the areas to think about for pension fund investment are ones where there is some other form of income stream other than coming from the Government itself. That is why housing is a particularly attractive example because you have tenants paying rent, energy efficiency offshore wind. Those are big areas that require private investment rather than publicly owned assets. I think that commercial property in our big cities could all be very good sources of attractive opportunities for pension funds to invest in if they had that increased local focus. In terms of getting pension fund money into public assets such as schools, the only way that can practically happen under the current sort of accounting rules is through a project finance, PPP or NPD-type structure. Mr Dotsch, if I could turn to you, do you have any idea at this moment in time what percentage of pension fund money is invested in Scotland? Local government pensions scheme? No, I think that I said that earlier on. The Scottish Government does not hold that. Dave Watson has helpedfully given an estimate that has been done work on behalf of Unison but we do not have formal records on that. In terms of the work of the new group, is that one of the things that they will be looking at as part of their work programme? Transparency of investments in general, so that would include into infrastructure but also other areas. Mr Watson, do you want to put your estimate on the record, please? No, it is nowhere turning out from Scotland because the UK won in the last figures that we have was about a quarter in the money that was going to UK equities. There is no way of breaking that down between Scotland and the rest of the UK. Alex Rowley, please. Good morning. A lot of this seems quite complex and I have always found when you speak to finance people in local government or whatever, there are a lot of reasons why you cannot do something. What I will try to bring back to is that if there is a political directive that says, for example, let's take housing, because we have a housing crisis in Scotland. At a local government level, there is a political directive that says that we need to build houses over the next four or five years and we need to fund that. My question is, what are the barriers and how do we break those barriers down? Rather than starting from a point of view of the Tokyo Express, you say that if it is a good investment, that depends on how you measure good, I suppose, because there is profit. If it was housing, there would be the profit that comes from guaranteed rents. Personally, I would say that we need to see council housing being built so that your guaranteed rents has housing benefit there. We know that the return might perhaps not be as big as the Tokyo Express, but there is still a return, but the good of the social good for the communities and for housing. Rather than trying to go around all those different complex classification rules that are there, if there is a political directive that says that we want to invest in that, how do we go about that? What are the barriers? Should that not be our starting point, rather than looking at the complexities? Let's go to Mr Morris first, because you seem to have managed to break down some of the barriers and invest in some housing. I think that the starting point is that, in our fund, a 1% investment return is worth 8% of the total pay bill. As has been said earlier and says in my paper, to do local investment you have to satisfy the twin aims of commercial returns as well as supporting the area. I will talk through briefly the illustration that we have with Manchester. Manchester is just like any other area of the country. There is a big shortage of houses. We did not go down the social housing route with Manchester because we did not think that that was capable of delivering a viable return to us. Our pilot is 240 homes. The proportion that was for sale and rent was driven by the target return that we were seeking. There is a bit more risk attached with the sale option because you do not know what you are going to get and you do not know how quickly you are going to sell them. The sale option produces a higher risk of return than the rental option. In terms of the numbers, for us, to get a viable return it had to either be sale or market rent. We have got a mixed range of sites. The reality is that some of those sites will have a very high one value per plot. Some of those sites might have a negative one value per plot. In terms of our appraisal, we appraised the five sites together and the return was based on all the five sites that had it up. If you have a negative one value on a site, you have to give somebody some money for them to build to make it work. One of the good things about what we did is that housing took place earlier than would have otherwise been the case and more of it took place. The expensive site managed to sell that site to a private developer and the private developer would have built homes on that site. However, putting a mixed range of sites together enabled the aggregate to deliver a satisfactory return for us and a satisfactory return for Manchester. Manchester reached the benefits of more rates, new homes bonus and all that goes with it. The way that the deal is structured is in effect, from our perspective, for a long time a fixed interest type return. At the end of 21 years, we will get any equity type returns that flow from it. There are four or five parties that are quite important to make this work well. We have obviously got to get on well with the City Council. We need good project management and good technical skills. We need a good builder. We as a pension fund do not want to be a direct landlord, so we want, in effect, a tenant who is going to act as landlord for all the other properties. Not only are they a tenant responsible for the property management, so they will calculate what rent they think they can get and then they will knock off their void risk, their repair and maintenance risk, their bad debt risk and that gives, in effect, a rent to us. The attraction of the rent is linked to inflation going forward. It is a 21-year lease. 240 homes cost us £26 million. There was the Manchester land value, which was obviously a reasonable sum in aggregate, and that is the way profits assured land value relative to our investment. The sale prices obviously varied depending on the location, just like they would anywhere else. The houses that we built are very similar, in fact, the same on most locations. At the very beginning, you said that there was more risk in dealing with the houses for sale than there were the houses for rent. Am I correct in that? What I was attempting to say there, I did not say sufficiently clearly, is that the rented properties, we have one tenant that is responsible, is a big registered social landlord, which is responsible for the vettings of the 120 properties and making sure that everything works, so you know that that can be guaranteed and you know that it is going to move over the next 20 years. What you do in your financial model, you make assumptions on the number of homes that you sell and the price that you sell them for. Fortunately, the way things are going, the housing market is working in our favour, so we're selling quicker and prices are higher than we expected, and that's something that will improve the financial returns from the project. I'm going back to Mr Riley's original question. Mr Watson? I'll be surprised that I probably wouldn't agree with Barry on the investing in PPP schemes, but I do agree with him that we're not saying, don't invest in the Tokyo Underground or anybody else. Obviously it's a balance, so we just think the balance has got a bit out of the skew when half the money is going abroad. I think the key point about a good investment for pensioners, the key word here is investment. This is not free money, it has to have a rate of return to it, and therefore investments in things that have a revenue stream like housing, like transport, like energy. We're very keen on local authorities getting much more involved in local energy generation. These things have a revenue to them, so they make themselves more suitable for pension type investment. Alec asked about the barriers. I think that there are a number. One is, I think that there is inevitably a small sea conservatism about pension funds generally and local authority pension funds are no different than anybody else. We've always done it this way. We know about some things, we're not so sure about other things. That's very closely linked to the issue of expertise. Again, pension funds know and understand equity investment. They understand commercial property investment pretty well as well. A lot of experience there. When you talk pension funds, both in the public and the private section, I deal with both. Very often they say we don't really understand social housing and we don't have the expertise and we're a bit nervous about getting involved in that area, to which my answer is we'll get the expertise. My view, probably one of the best managed pension funds in the UK is West Yorkshire who has an almost entirely in-house team and lots of expertise across the board. I think you can develop that expertise to build in this area. The other barrier tends to be a view of fiduciary duty, which I, again, is a fairly conservative view of fiduciary duty. There haven't been many legal cases and probably the worst one is a scargle against the Cowan case, which is pretty infamous. But, as we lawyers say, bad cases make bad law and that really was a bad case for bad law. I think there's been some more helpful view. The Love Government Association England commissioned council opinion on fiduciary duty. It's a public document now. I think that's quite a helpful description of how pension funds can be a bit more imaginative and not be too constrained by fiduciary duty. You've got to invest in the interests of the funds, but it doesn't mean you can't do a range of other things there. The final barrier is that it's been a problem so far, but there are obviously limits to the type of investment under the investment regulations 2010. One of the things we'll want to look at in the scheme advisory board is whether there needs to be more flexibility in those investment regulations to give pension funds the ability to be able to invest out with the current constraints and give some advice and guidance on issues like fiduciary duty as well. I think that housing is a really good example to answer the question. In a number of ways, we could increase housing supply quickly and I don't actually think that pension funds taking the lead in that is going to help in the short term because I don't think that they're geared up to do that at the moment. I think that with the Smith commission giving increased borrowing powers, I don't quite know where the schedule of increased borrowing power sits, but it could be very possible for the Government to borrow money and using public land and other land either in joint venture with Prime Secretary to build housing at scale with a view to selling that to a pension fund-led company at some stage in the future. Rather than waiting for the pension funds to develop the capability to develop a product that could be sold to pension funds, that could be done on a rolling basis, so more could be done. One of the things that stops that at the moment is the limited borrowing powers that the Scottish Government has. The current rate of borrowing or cost of borrowing for Scottish Government is about 2.4 per cent or 2.5 per cent over about 20 years. In terms of making it viable, mid-market rent housing could be done on a very viable basis at the moment at that sort of cost of finance. If you're then selling that to a pension fund, their interest would be probably in having a higher rate of return than perhaps at 2.4 per cent because that represents a sovereign sort of cost of borrowing, but nevertheless I think it could still be viable. What you may have to do is have a mix of, and it's probably quite a good thing anyway, to have a mix of private rent and mid-market rent and that sort of development to make it all stack up financially. I think that there are things to increase housing supply, but housing in many ways is, you said in some of the discussions, complex housing is probably one of the most simple things. There's the cost of land, the cost of building the house and the cost of finance. Those are the variables on one side and the rent or sale is the income on the other side. Government has an advantage and it's got a very low cost of finance, and therefore one of the things that we've done in the National Housing Trust is use local authority borrowing cost of finance to make mid-market rent viable without any direct subsidy. That shows that it can be done and actually with wider borrowing powers more could happen in that field. It's probably just worth highlighting, and I'm neither advocating government borrowing or PPP or any preference for either, but within the NPD programme 1.8 billion of projects have reached financial clues so far. Almost half the finance for that has come from pension funds and insurance companies. There are people investing institutional money into Scotland right now. A lot of that has come from outwith Scotland in terms of where the funds are headquartered, where the pension funds invest in that. It's very hard to trace back to exactly who invests in those funds. I think that that makes a point for me in some ways. If you have the right product, the pension funds will step up and put money in, and I think that housing, part of the challenge that we have is creating that product for them to invest in. Mr Doughty, I don't have a huge amount to add, I'm afraid. Investment specialities are not my area of expertise. My agency looks after the legislative framework and the design of five pension schemes. The local government pension scheme is one of those and makes sure that the regulations are looked after, the legislation is looked after. Obviously, to echo what colleagues have been saying just now and also just to remind the committee without overstressing that there is fiduciary duty, and yes, there is a more liberal way of looking at that. The pension funds exist not to produce infrastructure. They exist to make sure that pensions can be paid when they are due and when the liabilities fall due. It is the case that none of the local government pension schemes at the moment are fully funded. All are less than 100 per cent funded. For example, a number of pension funds over the years have decided that they would look at ethical investment and they wouldn't invest in tobacco because tobacco kills people here. Pension funds are able to make that decision in terms of the directors of the pension fund themselves. It's like in terms of the rate of return, you may not get as high a rate of return for investing in social housing in Scotland, but the social good of that, you could argue, is a much higher rate of return for the actual pension fund members themselves. I'm just trying to work that out and I'm trying to get back to it because my experience of these discussions is that these discussions take place at a level that most people don't understand and we never actually move forward. I'm trying to find a way of thinking to move forward. If you take Fife Council, for example, Fife Council currently have a programme of 2,700 houses being built. It's part of that. They would have had to work out exactly how much was going to come in year on year for those houses and it is a guaranteed income. They put the rents up, I think, by an additional 1 per cent to help finance that over that period and they went out and borrowed that money. So it seems to me that surely if there was a way that pension funds could actually look at a political directive coming from government at the Scottish level and local authorities to say, we want to use pension funds to finance a major housing programme over the next 30 years, then what's to stop us doing that? Can I maybe add to that, because we have in the submission from Strathclyde pension fund the statement, the limits on partnership investments contained in the local government pension scheme, Scotland management and investment of funds regulations provide a particular impediment to further investment. Is this one of the things that would stop these kind of things going on? Mr Dolcy? I think we covered that in the SPP paper that the Scottish Government recognises that these limits need to be reviewed and there may be a question mark about whether there are any limits required but that would be for the scheme advisory board to decide. We've not heard widely. Is this on high up the agenda of the new advisory board? Yes. Because I think that this is key for all of us here to know it is. The scheme advisory board could, for example, take an early view on whether there needs to be some short-term change to limits as part of a longer-term review of whether the limits are required at all. There's already a duty in the regulations in regulation 11 that requires local government pension funds to have diversity in their portfolio. I think that what would be very useful for the committee is for us to get an indication after your first meeting and probably the subsequent ones as well of your work programme so that we can clearly see how you are setting about bringing down some of these barriers. Mr Watson, I think that you were going to come in there. I'm happy to give that assurance as one of the joint secretaries that we're more than happy to do that, I'm sure. It will be an issue for discussion tomorrow's meeting about what the work programme will be. We put a draft in. This is part of that. I think the other thing that's in the work plan, which I think touched on the point that Alec Rowley was making, is some of the other constraints. The investment regulations go back to a time where there was a view that you had to be fairly prescriptive about the constraints on pension funds to stop them doing mad and crazy things. I think probably the world has moved on a wee bit. My own personal view would be that we could be a lot more flexible there with having a broad guidance which says you don't do mad and crazy things but rather than saying you must have 5% here and 10% there. If you look at Chad's paper, he summarises in the annex the current limits, which are fairly prescriptive. In the current environment, we might say to ourselves, do we need to be that prescriptive to local authorities from the centre? Or could we have a more general duty of the sort that you might find more commonly in the public sector? That doesn't get round the point that Alec Rowley was raising, which is essentially the constraints of fiduciary duty. Now, there's a complicated legal issue which I won't bore you with around the status of the various people, both councillors and our own members who are involved in the pension boards and committees about their status as trustees or not. But I think it's fairly clear there is a fiduciary duty. The question is, I think we need to tease out what the scope is to do that. Alec Rowley's quite right. Pension funds have found ways to essentially make views about environmental, social disinvestment campaigns on fossil fuels, all sorts of things like that. But they do so in the context of, as long as it doesn't undermine the financial viability of the funds. I think there's a scope within that that isn't well understood and I think we do need to issue some guidance and advice around that area. Again, that's something that's been presented to the scheme advisory board tomorrow for some clarity. I think that it would be extremely useful for us to get that work programme to see the things that you're working through because I think we'll probably find later while some panels, some funds have got ethical policies in place, others do not because they've been told that that may have fiduciary implications. Clare Adamson, please. It's really a supplementary to what we've just been talking about. What was wanting to understand, and I suppose that it's a general question for four members of the panel, but maybe a very specific question to Mr Morris in terms of the influence, if any, that they've been able to do. It's about the whole procurement side of what happens once the investment has been made, because, for instance, could an ethical policy include something that said that they would only invest in living wage accredited employers, or could there actually be clauses, I think, of some of the payback orders in terms of renewable energy about the number of apprenticeships created in an area as the procurement and the building goes ahead? Who wants to take a stab at that first? Mr Morris? We, when we are procuring contracts for our local investments, are always keen to have in place measures that are helpful. The number of apprentices, for example, on 1 St Peter's Square, there have been, I would be guessing, but it's a very significant number of apprentices. It's crilling our builder and they come on to the site, as well as work at other sites as well. That is something that is fairly standard. With our house builder, they do some community activity as well, so that's something that's carefully being done. But, generally speaking, it's something that the builders are actually wanting to do. The scale of builder—for example, my house builder—is its weights. They're all going to be sizeable entities that we're dealing with because of the scale of contracts that we're letting. At the same time, the people who we appoint to do the work are delivering it at a competitive price. Okay, Mr Watson? Not surprisingly, I'm going to agree with that. Obviously, you've probably seen our work on the procurement act and you'll be very shortly seeing comments on the new procurement regulations consultation ends tomorrow and we'll be publishing, along with a whole sort of society coalition, our view about how we can use procurement in a more effective way. Certainly pension funds are on the exempt from that in our view. I think it is possible to do that and it's possible to do that within the constraints of fiduciary duty. I think there are very clear business benefits of living wage, for example, which you could quite happily include in the same way as has been proposed under the procurement regulations to achieve that. I think that's true for wider environmental considerations, particularly when, at the end of the day, this is public money, as well as our members' money. It's a mixture of both. I think that the broader goals of Governments, which everyone signs up to in terms of climate change, etc., are all things that you can include there. The test, again, I think that you can get round. The test there is, does pulling these things have any material detriment to the fund? I think that the answer to that generally is no, but I think that the way you word it, the way you do it, just needs a little bit of teasing and a bit of guidance and help there, I think, would avoid us getting into any difficulties. Do you have anything to add to that, Mr Wight? I would say that, in major procurements, the procuring authority quite often will stipulate these things rather than the provider of finance. In Dumfries and Galloway hospital, there will be a community benefits clause as part of the contract that will stipulate a lot of that. In public procurement practice, that's widespread and actually is wholly accepted by the private sector. I think that if you're going to go more widely and say pension funds as investors should only invest in things where that can be guaranteed, I think that, as they quite often are small investors in a much bigger fund or smaller investors in equities on a worldwide basis, I think that you might start to either increase the monitoring costs or limit their opportunity to invest because I'm not sure at the moment that they could actually put that in. I think that they could control being a very small shareholder in a very big fund or a very big company that might trade globally, for instance. Procureers absolutely, and in a local investment base, I think that that would happen should that greater focus on local investment happen, which I think would all like to see happen by pension funds, but in that wider portfolio I think that we would need to trade carefully. I think that we would just like to make sure that the committee understands that the regulations already require a statement of investment principles by each of the 11 funds, and that's meant to take account of their environmental, social, governance responsibilities. It's entirely possible for them to set out that that would be their preference for investing in those. At the heart of that is that there is always going to be a balance to make sure that, unappropriate, however you define that rate of return for the investment comes back to the pension fund. Again, perhaps to follow up on something that Mr Elliott was saying earlier on, it's helpful to remember that a pension scheme member will, of course, in the case of local government scheme in particular, perhaps, want to make sure that investment is going into the right areas. At the same time, there is a triennial valuation every three years as a valuation of the scheme. If the scheme is not producing enough in the way investment returns, what will happen is that there will be a funding gap. I've already referred to the fact that the funds are not 100 per cent funded just now. That's not a massive concern, but it does mean that they have less assets on current values than the liabilities they've got. If to give a bigger gap appears, what has to happen then is that employer contribution rates have to go up to try to pick up that gap. If you're not getting the right rate of return, of course, as an employee, you want to make sure that money is going in the right place. On the other hand, you don't want to find a situation where you're working for an employer that hasn't got enough money to spend on other services because it's spending all its money on investing in a pension fund. For those answers, I've got a final question just for Mr Morris, I'm afraid. Obviously, there's a long-term investment and the return is going to happen over a long time for the houses that you have in place at the moment. The Conservatives announced a short time ago that they're going to extend the right to buy to social housing. If that were to come to pass, how would that affect the business model that you have at the moment? It wouldn't affect us because the properties we've got are either for sale or they are market rent and they're on long lease in effect to a landlord. One of the things that's been very helpful to us has been how to buy has been very helpful for us. It's made it easier for some of our half-hour purchases of used help-to-buy, which means they can buy a house with a 5% deposit and 20% input. It's a long-term loan from the Government and that's been very helpful to us. That long-term landlord, would that be a housing association at the moment? The tenant-stork landlord map is registered to the social landlord, yes. Cameron Buchanan, please. Thank you very much indeed, good morning. We've heard quite a lot about Manchester and I'm just wondering if this is typical of the English local authorities. Also, do you ever work together with other local authorities to invest at the same time? Right. As you will probably have spotted, collaboration between local authorities on the investment side is getting increasing profile. What's the purpose of collaboration? The purpose of collaboration is to drive down investment costs at one level. It's to provide more expertise at another level, but generally the purpose of collaboration is to help produce higher net investment returns. In terms of our own activities, we are keen to work with other pension funds. We have got one very, very concrete example. We've got an infrastructure partnership, which is just established with London Pension Fund Authority. That's investing in infrastructure. Again, the purpose of that is to target investments at Manchester London, but there aren't geographical barriers so that they can be investing outside there if the opportunities are there. The purpose of that partnership is to increase net returns to us. In our sense, we've got good relations with the north-west funds and we've got good relations on M62 corridor. In terms of north-west funds, we've got one or two examples whereby we're pooling together where we're getting lower fund management fees in some specialist areas. In terms of local investment, we are at the higher end of the range in terms of our enthusiasm for local investments and we've been doing it for longer. Do you find that working together actually works with another pension fund or does Manchester lead in that case? In the case of LPFA, our agreement says that we will both provide a minimum number of staff to make sure that the joint venture works and that minimum number of staff is equal on both sides. From my perspective, we've got one or two examples with other north-west funds whereby increasing our collective investment, we're getting lower fees as a consequence of doing that. Likewise, one of the things that will happen with London, again, that's one of the ways in which we'll cut our costs, increase our net returns. I'll stop that. Willie Coffey, please. I wonder if I could return to the point that Mr Doughty was leading us towards there when you were talking about fully funded schemes or not. You said that the 11 schemes that we've got are not fully funded. I take it that they don't need to be fully funded in order to meet current obligations to pay pensions, for example. I'm interested in what's been happening here. Is that a trend that's been happening over the past few years that pension funds are becoming less fully funded? Maybe you can tell us by what amount. Is that what's leading to the imperative to find new ways and new opportunities for investment to top them up effectively? If that's the case, what does the governance around all that look like so that people who are investing in the funds can be assured that there will be some kind of payout to them when they require it at a future date? Mr Doughty. To be clear, that point was made in the context of balance to make sure that the right kind of level of return is coming in. There isn't a situation that the Scottish Government is concerned about the level of funding in the local government pension scheme in Scotland. It is generally better funded to a higher level than the counterpart scheme for England and Wales, but it remains the fact that it's not 100 per cent funded. It's an interesting one because it rather depends on the day that you take an assessment of what the funding level is. It's broadly, I think it's maybe slightly down on where it was three years ago. I'm not quite sure why the latest trend or valuations have only just been produced by the 11 funds. There is no concern and I wouldn't want anybody to think that there's any concern that pensions aren't unable to be paid. I think that that covers all those points for you. Where's the imperative coming for new investment in housing? It's great that we're doing that and you're doing that, but is it a necessity to make sure that the pension funds are being topped up to get that kind of return on investment in housing? Or do you just want to do that? From my perspective, now is the most difficult time in my working life to be managing a pension fund. What's the reason for that? Generally speaking, our number of employees in the fund are shrinking. Our number of deferred pension members are growing significantly. At our fund, the value of benefits paid exceeds the amount of contributions by £100 million per year. We have investment income of £300 million coming in, so it's not too big a deal from a cash flow perspective. But it doesn't have to make things difficult. The number of employers is growing rapidly in English funds, and that makes it more complicated. When you superimpose on top of that the economic environment, where nobody in this room could ever imagine six years ago that you'd have investment interest rates at half per cent, you'd have negative real returns. You can lend money to the German Government for 10 years and you don't even get back what you gave at the outset. This is a weird, weird world in which we're living in. How are liabilities priced? Liabilities for many funds are priced on the basis of what the interest rates are. The lower the interest rate is, the higher the value of liabilities, and that's a key reason. Investment returns are higher than that where an assumption is, and that's driving the increasing deficits. It's a really, really tricky environment to be managing a pension fund. You look on the 10-year view for what investment returns are going to be on the... Most investments in bonds are going to deliver nil real returns. This is tough. One of the reasons why we do local investments is we're enthusiastic about it, and we believe that we're capable of generating commercial returns, and it won't make a massive contribution, but it will contribute positively to our funding position in the long term. I don't disagree with any. I think it is a challenging time for anybody involved in pensions. I have to deal with them in all the public schemes and the private sector ones as well. I think we should remember what we mean by fully funded. Fully funded is essentially, as Chad says, that your income matches your liabilities. I have to pay that out if everybody in that pension fund left tomorrow morning. Now, some of our members might fancy a bit of early retirement, but it's not going to happen, I'm afraid. The reality of having to meet that immediately just isn't there. It's just the accounting tools that we have to do. That doesn't mean we haven't got an issue. I'd also say on the last valuation that we had, obviously there's one at the moment we're waiting to see the numbers coming out of it. The last one Scottish Local Government pension funds were in the main, all in the mid, the average was around the mid 90s. Now, let me tell you from, I've got schemes in the private and the voluntary sector who would, only in their wildest dreams, would be at that level, at that level of funding. There are private sector schemes that are at 50% and 60%, there are voluntary sector schemes there. Nagio percent, some of our funds, we've no funded at the last evaluation, 100% and 405%. I'm not saying that that means we haven't got a challenge. We certainly have, but I think we just have to be very careful because we don't start a panic around the view that there's a problem in terms of the investment. There is an issue and funds are having to be much more aware. Certainly in recent years in local government, obviously 50,000 jobs have gone out of local government since they were nearly 60,000, since the crash. So that a lot of those have gone, not all, by any means, but a lot of those have gone in various forms of early retirement. That has a cash flow implication. So when you're investing and looking at pension funds, you need to probably have a little bit, you have to keep an eye on where public sector finance is going to go. So if it looks like there's going to be further job losses, you have to have more in cash or at least readily available funds rather than 25-year investments for obvious reasons. So these are all, it's a changing environment, but it's not one that we should be panicking about. Will I please? That's really helpful. OK. Thank you. Thank you, gentlemen, for your submissions today. I'll suspend and we'll have a five-minute comfort break and a change of witnesses, please. I'd like to welcome the second panel, Richard Macindoe, a Strathclyde pension fund and head of pensions with Glasgow City Council, Steve White with the North East of Scotland pension fund and head of finance at Aberdeen City Council, and Brian Smale with the Falkirk pension fund and head of finance at Falkirk Council. Before we move on to questions, do you have any opening remarks you'd like to make, gentlemen? Nope. OK. We have heard from others about the restrictions that there are on local pension funds investment activity. We've heard about some pension funds having ethical policies in place. Could you explain the position of your own pension fund in that regard in terms of ethical policy and what you see as the major barriers for Scottish pension funds in investing in local projects? Could we start with Mr White, please? One of the big barriers, I suppose, in the last five, ten years, is the move of the financing of infrastructure and public sector projects into NPDPFI-type deals, which has seen a number of private sector elements come into the funding market around that. That's kind of opened the eyes, I suppose, of the pension fund in terms of those opportunities. Certainly trying to get involved in those kinds of projects, investing in infrastructure, the accounting regulations are clearly a barrier to trying to get into that kind of marketplace. Certainly within Aberdeen we did look at the potential for our three hours project to buy out the debt when it was being sold by the financier probably about 12, 18 months ago. Clearly the barrier there was the restrictions from the accounting side. We discussed that with the SFT and the Scottish Government at the time to see if there's a way around that, especially given that the debt was being sold at below par value. Clearly those kind of barriers are probably one of the restrictions that we'd like to address. In terms of the schools for future projects, there's obviously a number of projects that are going forward. Within the agreement that we have with Hubco, we're able to purchase subordinate debt, but again it's a small amount of public sector money that can really go into that. Again, even trying to use the pension fund as an investment vehicle for that, again there's limits around what we can do, but again I think these types of infrastructure projects is where I think pension funds could have a potential to come forward and invest and they have a strong covenant sitting in behind those investments because it's obviously the local authority that would be investing or funding that. I suppose that would be my initial assessment of the restrictions that we face. In terms of Aberdeen, Donald Duckert, one of your housing guys, has got a fairly substantial and robust, it seems to me, mid-market rent plan. Would it be a wise investment for the pension fund to get involved in that housing investment? Absolutely. At the moment we're just starting to pull together the kind of procurement that will sit around all of that and to go to the marketplace and the pension fund is very much in discussions with those officers to discuss how potentially the pension fund could invest or certainly put in some sort of investment with about a thousand houses over the next two years that are looking to kind of put together. Again, trying to find the kind of package that that would allow to work because clearly if you're looking at affordable housing you really are looking at some sort of, I suppose, grant to make that financial model stack up. So it's about trying to get the right mix between affordable, mid-market and private housing and absolutely the kind of level of infrastructure projects that the council is producing at the moment. Certainly the pension fund is now starting to look at the potential for investing in there and housing is just one of those elements. We've currently got the city centre master plan for Aberdeen and how that's going to transpire over the next sort of 5, 10, 15 years. We have the city deal which has kind of been supportive in principle from the Scottish Government and the UK Government. Again, that's looking at some in the region of about £2.9 billion of investment in Aberdeen over the next sort of 20, 30 years. So again, looking at those kind of areas of where the pension fund could potentially step in and look to try and invest and get the level of return that it would need to justify that kind of investment. Again, as I said, it comes back to making sure that the return to the pension fund is there. Thank you. If I can move to Mr Smale, Falkirk has seen as being one of the trailblazers and breaking down barriers and using pension funds for local investment. Could you tell us how you've gone about your business, please? Thank you, convener. That essentially flowed from our pensions committee taking an interest initially in exploring the potential to target investment, infrastructure investment on a more local basis. In the matter of social housing, we and the committee took quite a long time of a journey of exploration, if you like, to get to the point that we were comfortable that this was an appropriate option to pursue. That trail included a seminar conference that we hosted in Falkirk, to which a number of relevant stakeholders were invited, legal firms, potential investors and RSLs, all used to build up a picture of the potential as we're obliged to do under the regulations. The fund also has a specialist adviser who fed into that mix. At the end of the journey last year, the pension committee took the view following a competitive tendering process and having heard the offers that were coming from the market. We effectively put a wide remit to the market just to see what was out there. We were quite flexible in terms of allowing the market to come forward with innovation and initiatives. From that process, we selected a particular tender offer and are actively pursuing that at the moment in terms of actual investment in housing. In fact, I can say yesterday that the council's relevant committee affirmed from the council side, bearing in mind that the pension side is separate, a proposal that would harness part of the £15 million that's been allocated to social housing for actual investment in the funds area. That's about 90 houses, so it's moving forward. Things will start soon to happen on the ground. Thank you. Mr Macindill, could you give us the Strathclyde perspective, please, about barriers? Well, our perspective is that there are no absolute barriers. There's no absolute impediment to investment in infrastructure or indeed investment in local infrastructure or Scottish infrastructure. Strathclyde has invested £275 million to date, starting very recently, because infrastructure wasn't really a recognised asset class, a recognised investment strategy for institutional pension funds until the last few years. Starting quite recently, we've invested £275 million in infrastructure, much of it in Scotland. We've done that through a mechanism that we created internally called our new opportunities portfolio, whereby we recognise that the investment structure that we had, which is a fairly commonplace structure, I guess, amongst UK pension funds, was to appoint external investment managers to run usually very large portfolios of investments, mostly listed investments, and to a large extent overseas investments. We are a global investor. We recognised that that really didn't give us much of a facility to invest locally. In 2009, we created that facility called our new opportunities portfolio. It's not a local investment portfolio. It has a very wide remit to invest in all sorts of things, but from the outset, it has had a preference for what we call impact investments. That means investments with some positive impact, either in social governance, environmental terms, or local investments. To date, the majority of investments through the new opportunities portfolio have had some form of local element. The initial focus was on small and medium-sized enterprises in Scotland. We made a couple of investments in that area through Scottish Loan Fund, in which we were a founder investor, a creation of Scottish Government effectively. Panoramic Equity Fund, which is a UK-wide investment remit but located in Glasgow after we agreed to co-invest with them. We were, I guess, from the outset more familiar with company investment, we're a very well-established private equity investor. Quite early in this journey, we recognised that there might be an opportunity in infrastructure and housing. We were a very well-established private equity investor. We were a very well-established private equity investor. We were a very well-established private equity investor. In infrastructure and housing. We wrote that into the remit of the portfolio in 2012 that we would focus on infrastructure and housing and economic development. Deals that we have done to date include a couple of housing or housing-related investments, most notably the city legacy project that built the Athletes Village for the Commonwealth Games in Glasgow for last year, which subsequently has been retrofitted and has become 700 units of social or mid-market housing and various other facilities. We were not the major part of the funding package for that, but it was a significant part. We provided the cash flow funding, which was the last piece in the jigs of the funding package. We're well aware of the Athletes Village and as many members have visited there. Are there any other housing elements that the Strathclyde fund has been involved in? We've recently made a couple of commitments. One for a supported living residential development, which will be UK-wide, and a specific residential project within East Lothian. Again, for that one, we're providing the cash flow funding as part of a larger funding package. We are looking at various other housing projects, which may come to fruition shortly, but so far we haven't identified one where all the pieces fit together at this stage. In terms of ethical statements, could you give an indication of what your own pension funds do in terms of ethical investment, Mr White? In terms of ethical investment, we would look at the wider global markets, but the pension fund's view is that we need to look at returns. To be honest, the pension fund invests in tobacco companies. And arms? I believe so, yes. In that respect, at this stage, the pension fund is looking to get those returns from those high-yielding investments and companies. What we're saying is that the north-east pension fund doesn't really have an ethical investment policy? It doesn't have an ethical policy in terms of the wider world, and it's not investing in war zones and things like that. Just the arms that go into the war zones? We need to look and see exactly what companies are invested in. I think that it would be interesting to get a copy of the ethical statement that the north-east says that it tears to. In common with all funds, as you may have heard Mr Dottrey say earlier, we are required to have a statement of investment principles, and that's kept under review. I suppose that the essential part of the ethical stance is one of proactive engagement with companies where there are issues, and that's done on our behalf. Maybe I'll just cut to the crunch like I did with Mr White. Do you invest in tobacco companies, Mr Smale? Also in alcohol and companies that sell fizzy drinks, etc. I think that I'm making the point where you draw the line. There's a whole range of products that are not benign attributes attributed to them, and a pension fund would have some difficulty in deciding whether to draw that line. I think that it would be interesting again for us to get your statement of intent there. Mr Mackendo, the Strathclyde situation? Similar, we don't exclude any particular sector or category of company from our investment policy. That's common amongst almost every UK pension fund I know of. They don't exclude investments. There are various other ways to achieve ethical or environmental, social and governance aims, which usually involve engaging... But not through pension funds? Not through disinvestment from companies. Okay, thank you. Again, if we could get a statement of your investment principles, that would be extremely useful indeed. Alex Rowley, please. Hi, good morning. Can I start with the Strathclyde? I think that this is really quite impressive, the work that's going on with the Strathclyde pension fund. I did, although I've never visited the Commonwealth games village, I did see one of the first tenants going into the house in there, and it was a great story, and it was great to see. It's that type of investment. Can I specifically on this? Have you had to increase the expertise in the management within the Strathclyde fund, or did you have to buy that expertise in? Because you seem to be ahead of the game quite a lot of pension funds in Scotland in terms of what you're doing. Does pension fund managers come together and share this type of information? Mr Matthew first, please. I think yes to both questions there. Yes, we had to increase the expertise. Infrastructure and new opportunities was a slightly different departure from us from our previous investment strategy. Initially, the early investments we managed through our existing resource, but quite early we realised we would need more resource. To date, we've only hired one individual focusing specifically on this portfolio. We have also bought some expertise externally in the market. The portfolio continues to expand. We've just increased its capacity to 5 per cent of total fund. The resource will need to expand alongside that. The second part of the question. In terms of sharing information, perhaps I can expand on that a bit and widen it a bit. I know that when I raise questions we've financed departments like Fife, for example, where they say, well, if you were going to go for a big investment in an area like housing, you'd need a number of funds to come together. Is that the way to try and move this forward to get the funds in Scotland to work together? Or is some funds too small to take on the type of thing that Strathclyde is taking on? Because Strathclyde, I assume, is much bigger than many of these funds? Strathclyde is, by some distance, the largest of the 11 funds in Scotland. Potentially, yes, that's the way to take these things forward. A fairly good example of that is the pensions infrastructure platform in which we are a founder investor and which brought together a number of the leading pension funds in the UK, not all local authority funds, but West Midlands are an investor in that as well. It was billed as an investment vehicle by pension funds for pension funds. It's making very good progress. It has agreed its first two investment tranches. We've committed 70 million to a contractually and 100 million in principle. It's been slow progress. The practicalities of bringing together a group of investors are numerous. Even if they're essentially like-minded, we and these other funds are essentially like-minded, but when it comes down to the detail of what you want to do, the details of the strategy, the details of some of your own investment rules, your governance, getting things agreed that these things take time. Could that model apply in Scotland? Yes. Scottish loan fund, which was a vehicle created for investment by pension funds and other institutions in the Scottish small and medium-sized enterprises, is a fund of that in the nature of where a number of investors were brought together. Do we speak amongst ourselves frequently? Has that led to any collective investment? No. There are some shared investments. Aberdeen is also an investor in SLF. There is potential there. Why is that potential not being realised up until this point? We have lots of investment potential. We're focusing on a whole bunch of different things. There are other people in the market trying to create infrastructure deals, housing deals. Perhaps they're a more obvious facilitator of these things. A project like that does tend to need a facilitator, somebody to bring funds together, co-ordinate. So why not put in place a facilitator, say Strath Clyde, or the Northeast, or Folkirk? It's not impossible, but it's not been part of what we've done today. We're an investor, usually in vehicles that other people have created. The creation of a vehicle is a different skill set. Mr White, why do you think that that hasn't happened thus far? I mean, I think the point that Mr McIntosh is just making. You need a vehicle to invest in. The pension funds are looking to invest in the vehicle, so I think the collaboration needs to come probably from the council side to create those vehicles. The collaborative working, I suppose, has been gaining impetus over the last couple of years where local authorities are now working much more closely with one another. So, for example, the city deal in the Northeast is a collaboration between Aberdeenshire and Aberdeen City. So that kind of collaboration is now starting to happen and those kind of infrastructure projects are now going to start coming to fruition. Those vehicles, I think, by definition will then have to be formulated to allow that to be delivered. The formulation of those vehicles then allows the pension funds the opportunity to do the financial due diligence around the vehicle to see whether there's a return that fits in with their investment strategy and would allow them to invest in those vehicles. So, I think it's that kind of stage that we're at in the process, but there's definitely a greater move towards that kind of collaboration across Scotland. A couple of comments, convener. There has been, Heather, two explorations across the funds and also involving the Scottish Government's financial innovation unit to see whether some vehicle could indeed be pulled together. This was perhaps several... a couple of years ago and I think at that time there was perhaps across funds a scepticism as to in terms of social housing. The alignment with the objectives of funds, I think that's matured and moved forward as you've heard from various speakers today and maybe the market is better placed for such a vehicle to come on stream. My second point is that the fund that we've invested 30 million into is an initial investment in a housing fund for Scotland that has... the fund manager has a potential, though I don't think it's a rigid figure, of up to 150 million that could be channeled through that source. So that's one vehicle that's already in place. So I think it's an emerging and developing market. I think that's useful, Mr Smill. Mr Riley. I mean, I will... The Strathclyde stuff I will be sending to the Directorate of Finance at 5, Mr Brian Livingstone in Stiam. You know, this is the kind of investments I think that we'd want to see, but the evidence session we heard, the last evidence session we heard, they talked about zero return on bonds. There was an example given the loan and money to... or put investment in Germany and now you can get your return back. So given where we are in this climate and the... not just in this country but across Europe, I mean, is this actually a good time if you were going to be guaranteed our own programme of investing in public housing, council housing across Scotland and you're guaranteed a rate of return, is that not actually a more secure investment these days given where some of the financial instability sits in the world? Who looks at that? Do you have fund managers? Could you maybe explain that bit to the committee? Who actually comes up with these, examines these types of investments that are possible? Who would look at whether investing in public infrastructure in Scotland was a sound investment? Who ultimately makes these recommendations? Let's start with Mr Smeal, please. Thank you, convener. If I jump back to the example I gave you with our social housing in terms of there was quite an elapsed period where our committee took the time to get a proper handle and understanding of the potentials of the market and that was done with a range of inputs from various sources including the fund's own advisors and having undertaken that journey, that research gained that understanding the committee reached a view that an investment of perhaps 2 per cent fund into social housing did represent a proper and attractive option for us. As you allude to social housing and indeed housing generally has the attraction of marrying very well with pension fund liabilities in terms of its long-term nature and frequently inflation-adjusted returns. Those were factors and attributes that fed into our decision-making process whereby we concluded that this was a proper level of investment. I think that you could perhaps categorise it as a win-win because taking on board all the comments that have been made earlier about the fiduciary aspect and having to operate within a framework of regulations and indeed case law, each fund has to take responsibility because we stand alone legally as legal entities to operate within a broader framework. It has to take a view as to how it will navigate its way through the issues that pervade investment decisions of this ilk. The fund reached a conclusion as the Manchester fund did in terms of housing as well that the return was consistent with overall funding objectives and the other part was that it had the capacity to enhance local infrastructure. That was in a nutshell. Mr White? The point that I would make is that what we have probably seen over the past three or four years is a much more firm understanding that there is a housing shortage in Scotland. Certainly in the north-east the level of private sector development has continued quite rapidly but, again, there are very different economic conditions in Aberdeen. That by itself has now led to a real housing shortage in Aberdeen for mid-market types of rents. The economic conditions in Aberdeen are such that the mid-market type of rents that you would traditionally expect are considerably higher than they would be elsewhere in the country because the ability of the council to attract key workers such as teachers, social workers, the health service to attract nurses and the police force to attract police officers has resulted in, if you like, a market failure that is now requiring the public sector to step in and correct that. That is now creating a vehicle that will result in building for those types of market places. That, by definition, offers the opportunity for funders to come in on the back of that. I think that what you are kind of seeing is a new emerging kind of market which is why we haven't seen a heavy level of investment from the north-east pension funds because that market condition is only really now starting to materialise and really pinch on the local economy and the growth of the city going forward. Hence, what we are now seeing is this emerging demand and the council stepping in to start thinking how it is going to close that demand. 1,000 houses over the next two years will offer the opportunity for the likes of the north-east pension fund to step in and invest and get a return. That needs to be measured against the other returns that you might potentially get. We heard earlier about you getting a no return if you were to invest in Germany. However, you can invest elsewhere and still get a positive return. Again, we can't just look at one investment vehicle and say that's the comparator. The whole point of the portfolio is to have it diversified so that you're not exposing yourself to one particular strong market area so that where there is a downturn in a particular area will generate sufficient returns to meet your future liabilities. The question that Mr Riley posed about fund managers remains unanswered there. Is it the fund managers that are guiding investment in the main and who are those people? We invest with fund managers in infrastructure UK-wide. The north-east pension fund is about £300 million but that's across the UK and it's more investment-type properties that they're looking to invest in. We would certainly be looking to do that internally rather than through potential fund managers to assess these housing developments. What we would need to understand then is that do we have the expertise in house or do we need to take in additional expertise to help facilitate that. It's an emerging area for us to watch and decide how we would like to take that forward but we certainly wouldn't want to immediately start engaging with fund managers specifically on social housing projects because clearly they will be charging fees around that. We would need to understand what our capacity and capability was internally before we started looking at the specific use of fund managers for social housing projects. In terms of the discussions that are being had at this moment Mr White are the fund managers that you currently have in place trying to put off your pension from fund from investing in social housing, for example? No. Grant, Mr Mackendale, please. In terms of the decision making of it for the new opportunities portfolio we've created a clear and robust governance process where officers will initially source investments through the market and through contacts. We will filter those down to the ones that are most ready to bring forward. They go to a board including the director of finance. There's a second sub a board which is effective a subcommittee of the main investment committee and any decision is ultimately with the investment committee. Throughout that process there may be reliance on a fund manager in which case officers will do extensive diligence on them. They will then have to present to the various boards and potentially to the committee before a decision is made. Are existing fund managers trying to put us off investment? No one or two of them are actively trying to facilitate investment in housing. I think that housing opportunity will come as I said earlier, we haven't quite found anything yet that we can invest in in scale. I think that it will come. The social housing opportunity may be a little more difficult. The rate of return there remains a bit of an issue. Yes, where the covenant is very good with strong public sector entities and there's a clear income stream that is very, very helpful. Registered social landowners historically have been able to borrow at very low rates. The interest rate remains very low. As Mr Morris said earlier the whole funding model for local governments based on a 3% real return within our local investment model translates to an absolute floor of 5% per annum for any investment. Minimum hurdle of 5% per annum. We need a return above that depending on the idiosyncratic risk of any individual investment. I think that social housing is still struggling to make that hurdle. But affordable and mid-market housing will make it more easily and that's probably coming. Okay, thank you. Cameron Buchanan, please. Thank you very much indeed. You mentioned under Strath Clyde in the practicalities that approving funding should not be underestimated. That would represent a significant impediment for a project to succeed in a strong committed leadership to manage each of these stages. Do you provide strong and committed leadership? You mentioned in the Commonwealth Games that you are a significant investor but were you leading it and if so, do you lead any of the investments? Mr Mackindo. The Pension Fund was not leading the Commonwealth Games project. The council played a much bigger role in it and it would be rare for the Pension Fund to lead an investment project. It is a different skill set. The creation of an investment vehicle is a different skill set. Most investment managers actually find the creation of the vehicle and the raising of funds and the co-ordinating of everything. Something of a distraction and extremely time consuming from the process of investing. We are an investor and the creation of those vehicles is our business. No, we do not typically lead investments. John Wilson, please. Good morning. I will go back to the issue about the expertise. I am looking at the Strath Glide submission and it says that in practice, however, pension funds have often not found infrastructure investment easy to achieve. Reason cited are lack of in-house expertise, high external manager fees, risk inherent in greenfield investment and so on. Why have the pension funds not brought in the in-house expertise to deal with some of the issues that you have identified? Clearly, if it is high management fees that are putting you off from investing in particular areas, has there not been a lost opportunity to invest in the in-house expertise so that the pension fund could take that forward in trying to go to external manager? We are taking that opportunity and trying to take that forward. Those particular things that you mentioned that are in my paper are a quote from our initial investment proposal for participation in the Pensions Infrastructure platform. They were some of the reasons that the Pensions Infrastructure platform was created to overcome those barriers. We are a founder investor. There are further tranches of investment to come through that. It has successfully overcome those hurdles. That collective of pension funds has recently appointed a chief executive with great expertise in the infrastructure market. The first tranche of investment was through a fund but, again, the collective was able to negotiate a fee for the vehicle which was some way below what I think would be market. That is happening at least in a particular instance and I think there will be more of that. John. You mentioned the external manager fees. Can I ask the three panel members what the average cost of administering the pension schemes that are being administered by local authorities in terms of the turnover in terms of the pension fund? If you are comparing external market fees, then there are fees borne by the administration of the pension fund and how does that compare with, say, wholly handing over the pension fund to the general manager? To put a number on it, our investment management cost is a little below 0.2 of a percent of investments under management. That is all external cost. For individual investments it varies from a very, very small percent, so less than 0.1 of a percent of passive listed equities to 1 per cent or more for more complex investments that would include infrastructure funds, which typically would have a complex investment that would need a lot of management. A typical market fee for an infrastructure fund would be at least 1 per cent, usually with some performance element attached to that as well. 0.2 per cent overall. What is that in cash terms? 0.2 per cent does not sound very much, but I am sure that if you are looking at the Strathclyde pension fund, 0.2 per cent adds up to a huge amount of money. £18 million per annum in our 2013-14 accounts. The 14-15 figure will be significantly higher because the disclosure rules have changed, so we will see higher figures disclosed in this year's accounts because they will include not just what we pay as investment management fees but various costs underlying those investments, so transaction costs and where we invest in funds or fund of funds all of the management fees at every layer. So £18 million last year, but there will be a bigger number this year. Any indication that that number will be? No, we will have another six weeks to put that number together. The cost of administering the fund internally is probably around about a million for the administration of payment of benefits and the investment side internally that we have. The fee structures again for the individual fund managers will vary depending on the type of investments that we are asking them to undertake and again I would be struggling to provide the number off the top of my head but it would be several million but again the new disclosure is a bit like Strathclyde until we actually get 14-15 accounts completed we won't have that number but happy to supply that to the committee once we get to that position. I think that would be very useful for us Mr Smail please. I think that the framework that Mr Mackendove outlined in terms of percentage rates would be common across all funds and the cash equivalent would be proportionate to the funds. Maybe one other point that I could helpfully make is that another strand of our local infrastructure investment in addition to the social housing is a partnership arrangement that we have with the Lothian Pension Fund and in our evaluation of that we concluded that by using that channel and their in-house capacity and expertise being a much larger fund than ourselves saved us on management costs or the cost would be circa a third of what we would have expected to pay had we used an external manager so I think that there was a very clear cut example for us anyway of using in-house potential albeit not in our own fund to save on management costs Again, it would be very interesting for us to see those numbers too Mr Smail, if they could be passed on to the clerks I'd be grateful. Just on that point from Mr Smail what opportunities I take on the Lothian and the Falkirk working relationship in terms of the utilising expertise within different pension funds what opportunities are there Scotland-wide for the 11 pension funds to work in that collaborative fashion to look at how they carry forward the investment programmes Mr Smail There may well be potential on infrastructure in the same or a parallel manner that we touched on earlier with respect to social housing I think from what you see what we're having at the moment is a process of evolution the Falkirk fund engagement with Lothian is of itself albeit maybe relatively small scale and innovation but it's demonstrating a willingness to explore avenues and I think perhaps over time and on the back of discussions such as this which may well give a boost to exploring the potential more thoroughly so I think it's very much in progress might be a fair way to categorise it representatives of each of the pension funds meet on a regular basis and as we've touched on earlier I think the collaboration on the overall agenda for local government is certainly on the increase and there certainly needs to be that kind of exploration in more detail around where potential cross and working can take place I know that at director of finance levels across Scotland that's also now starting to shape up if I can take myself I'm the head of finance I'm also at the present time the head of finance for Shetland Islands council as well so that type of collaboration is now starting to materialise across Scotland and I think we're at an early stage of that within the pension funds and obviously a lot of us have got mandates made into at the present time so we need to start looking at those and understand where there's the potential to have that kind of cross-sharing of expertise but I would have to concede that it's probably in its infancy at the present time Mr Mackinill, please I don't think I've much to add to that there's been a lot of collaboration historically but it's largely taken the form of sharing ideas, sharing experience sharing information there are a couple of other examples across the UK so the administration system that most funds used is jointly is jointly not jointly procured but is jointly commissioned from its provider across the UK and on responsible investment the local authority pension fund forum which we have just joined as a fund the majority of local government funds and it is quite a significant voice in lobbying companies in the UK and further afield about their standards of responsibility there's very much kind of spirit of the day to actually extend that to collaborative investment but there hasn't been much of that to date, those partnerships I think are just starting to be formed John, it's interesting Mr Mackindo ended there in responsible investments given the earlier discussion of convener and ethical investments then it would be interesting to see the paperwork in terms of the ethical investment strategies of the pension funds but in terms of an earlier response was that part of the investment strategy in terms of the mainline investment was because there was no investment vehicles there in place to actually alternative investment vehicles established has there been any discussion and some of these pension funds have been around for no three decades whether or not there's been any discussions in terms of looking at joint work between the pension funds for investment vehicles that are more akin to what would be seen as social corporate responsibility in terms of investment Mr Mackindo Historically there has been I think only in frequent discussion of collective investing there are no shortage of investment routes for pension funds or investment vehicles for pension funds and we've all pursued our own strategies so it's only I think more recently that the discussion of collective investment by local authority funds has come to pass sorry has come to the fore could that also involve a responsible investment vehicle yes it depends on the definition of responsible investment most of the procurement of investment we do will have certain governance criteria we're a very active promoter of living wage a very vocal proponent of living wage so any vehicle we created would embed those sorts of things whether it would be directed towards a particular type of ethical investment I don't know I don't think there's any plans to construct such a thing I'm going to play devil's advocate here which I always tend to do at this committee at a point you're here today gentlemen in your roles as pension fund managers but you're also all three of you heads of finance with your authorities and in Mr White's case two authorities and in terms of the discussions that there's been about vehicles the kingsaws themselves wearing your other hats could quite readily create those vehicles for your funds to invest in so these discussions and things which we we've heard about in early stages and all of the rest of it you know surely the discussions about some of this have already been taking place at councils which goes back to Mr Rowley's earlier point about the political will is the political will being ignored and have you guys not got to the stage yet where although you wear your separate hats at various points that at some point you know there's going to have to be an intertwining to get things moving in this regard Mr Mackindor I should clarify that I only wear one hat I'm responsible for the pension but I'm not a director I beg your pardon is there the political will our investment decisions are made by our politicians and as I've said we've invested £275 million we've capacity to invest £775 million in the new opportunities portfolio as it stands so there's a willingness there Mr White I mean as I say we're certainly in the quite advanced stage of additional housing in Aberdeen and I think once we get in and hopefully think about the next 3-4 months to a position that a proposition can be made to the pensions committee once we make that proposition to the pensions committee we'll have a better understanding of what their view on that investment is but clearly it's a committee decision but from what I can see I mean certainly from what I can see the political will is there to move those things forward as quickly as possible and quite clearly we're under instruction to have the thousand houses built by 2017 so quite clearly we need to get the vehicle in place and we need to get the investment in place and we need to do that over the next few months Mr Smeal please Yes convener I think it's important to bear in mind that the pension fund is very much a separate and discreet legal entity for specific responsibilities so it is very much a case of wearing two hats and one has to be wary and sensitive to potential conflicts of interest and I can give you a practical example of that in terms of our housing investment the pension committee has made that decision there is a local in terms of Falkirk housing dimension to that decisions have to be made into the council and one has to be very careful that one separates advice from the pension fund and its objectives as opposed to the particular imperatives that the council with its responsibility for its own housing stock has to make so it is an important area to have regard to and to be aware of John Wally Coffey please Thanks very much convener it's a very interesting discussion we're having a issue of transparency in the involvement and participation of local members in the decision making that Mr Mackendo referred to there in my experience I don't think it would be particularly clear in the past exactly what the pension funds were being invested in and what companies and for what purpose I don't recall that kind of level of detail ever been shared with elected members I would find it difficult convener to believe that local councillors or whoever would be particularly comfortable with proposals that would invest funds in arms companies or tobacco companies these days can the panel give us any examples of whether your various pensions funds have been prevented from making investments in what folk might consider to be unethical sources or is it happening behind the scenes and under the radar in terms of overall investment strategies and with the new regime that's coming into place and hopefully the new transparency that we'll see here will that be much more in the public gaze do you think will the public be able to see where these investments are going and perhaps to ask for disinvestments to take place perhaps from some of these investments it's never been clear to me where these investments are going over the years and I'd be interested in your views about this I know that certain councillors are already unhappy and have made their views known in various places Mr White first please I mean quite transparent with councillors about investment decisions we set mandates for fund managers fund managers meet with the committee on a regular basis they discuss the investments that they've sold investments that they've taken on over that period within the agreed it's relatively as transparent as it probably can be clearly those discussions with the fund managers are probably held as exempt because it's commercially sensitive information about how the fund managers are investing and what their strategies are around all of that but how often was councillors who are making these decisions and meeting with the fund managers be told that if disinvestment took place in certain areas that they would be failing in their fiduciary duty sorry could you say that question again please sorry in terms of councillors who are meeting with fund managers councillors who may have opinions about disinvesting in certain areas who are told that they are failing in their fiduciary duties if they remove investment from say arms or tobacco how often does that happen I mean that we have to each individual member of the committee to make that comment to a fund manager so that the fund managers are met with on a regular basis and as I said it would be up to the individual member of the committee to make that expression known to the fund manager so but if a member is one of the greatest fears I think that any councillor could have is a finance officer to say to them if you do that you'll be failing your fiduciary duty so if a councillor who has talked about disinvestment is told by an adviser to that panel which may be a councill officer could be the fund manager that they'd be failing in their fiduciary duty is it likely that they would move forward in terms of trying to deal with that disinvestment I mean that would be a decision for the committee member to make certainly my role would be to provide professional advice around a decision that the committee was trying to move towards if you wanted to pull out of a particular investment and we invest elsewhere then you would need to weigh up the fund investment portfolio as a whole not just focus on a particular element so to some extent it would depend on the disinvestment that the committee member was trying to propose and then how we would then articulate that back into the overall investment strategy that's set but again the investment strategy is reviewed annually and we're a way to reset our investment strategy moving forward now that we've got our triennial valuation back in we now have an understanding of what our funding level is the pension fund so again that kind of drives the investment strategy that you'll sit with so Mr Smill I mean just by way of background albeit as has already been outlined the governance arrangements are changing but at the moment our pension committee consists of six council members counsellors one representative from the trade union another representative from the employers and one pensioners representative so there are a range of stakeholders around the table from time to time there is discussion there may be a particular flurry in the media over a particular aspect of investment that might be tobacco, it might be ornaments and those discussions take place it can also take place of a strategic review which one is due for us probably the case for most funds in the back of the triennial valuation that's just been completed and there are other triggers so it's something that's very much in the arena but I guess cunning to the chase there is a significant issue that needs to be addressed around fiduciary duty because if a committee as trustees and given their primary objective is to make returns for the fund to enable pensioners to be paid if a significant divestment decision was taken to say for ornaments, tobacco or any of the other raft of areas that could potentially be in the frame that are held to be not benign products or services the committee would have to be very careful about fiduciary duties it could make that call make that decision without detriment to the returns of the fund so I suppose in simple terms to the extent that you could decide to disinvest from any of those areas but could find an alternative investment that gave you the same or better returns that would allow I think a route to be navigated through and the converse would equally apply to the advice that was from such a decision that would risk diminishing the returns you could make from that investment then the trustees would be I would think in an invidious position so it's very I think we all appreciate these are very sensitive in important areas and stakeholders do have widely held and strongly held views on these issues primary fiduciary responsibilities of the trustees of the fund under regulations as they currently sit and case law as it currently stands so in many cases it may well be that folks have very strongly held views but the advice that they are given is you cannot disinvest because this would be breaking your fiduciary duty I think as my colleague said it would be for the individual trustees to make that decision and it would be to advise we are not the trustees the trustees are the ones that make the decisions I understand that Mr Smale Mr Mackindor, please chair first I think as a fund we are very transparent all of the business of the fund is carried out in public all of our committee papers are publicly available they include a huge amount of detail on our investment strategy our investment structure and that's where we try to focus because that's largely what investment is about it's about strategy and structure for us in terms of individual investments we we have about 2,600 last time I looked at individual lines of investment and perhaps as many as 80 or 100 fund investments each of those funds is making numerous underlying investments so it's a very long list it's available on request we periodically publish a full investment list they're not very often because from our perspective I think it's about the strategy we're pursuing rather than the individual investment lines in terms of fiduciary duty I think various funds including ourselves historically have at some point sought council's opinion on what fiduciary meant in respect of investment responsibilities for a pension fund and that has tended to support the idea that disinvestment on the basis of ethical considerations would be a breach of fiduciary duty and that has tended to be the advice to committees on the basis of council's opinion and to date I think that's still the case that may be changing there has in light of a law society review last year there has been some reinterpretation of fiduciary duty I think Dave Watson alluded to that in the earlier session that reinterpretation hasn't been tested yet however Glasgow city council agreed a motion just in the last few weeks to commission a report on the possibility of disinvesting from all fossil fuels the great demotion in the last few weeks I am in the process of working out just how to get that report who can provide it it's likely to include council's opinion in light of the recent reinterpretation so we will be revisiting that in the course of this year OK, Willie Thanks to our free colleagues for clarifying that particular point Do you anticipate that any change to regulations might allow pension funds to include this ethical element correctly and properly that might ultimately overcome this concern about the fiduciary duty of the members that serve on them? Do you think? I would find it difficult to imagine though clearly I am not in a position to predict the future and won't make such decisions but my view would be I would find it difficult to believe there would be a market change in the current scenario I think consistent with a lot of what we've heard today is more of a an evolution in stages as Mr Mackendo touched on one can perhaps see over a couple of decades the famous Scargal case was referred to by Dave Watson earlier and the proceedings from perhaps a more trenchant view then to more contemporary views and I think it becomes more nuanced but I don't think that regulations of themselves will fundamentally change that fiduciary duty and the responsibility that individual trustees have on listening to their advisers to make a call on it the regulations I see as being a component in the equation or a subset relaxation of those may more readily accommodate the mechanisms by which social and infrastructure investment may be taken more fruitfully forward Mr White, please I mean, obviously we can put in place legislation and give guidance around all of that I mean, I suppose fundamentally if you were going to look to disinvest in specific elements clearly we would need to understand what the impact of that would be obviously a lot of these kind of areas that we invest in are high returning high yielding investments so to preclude them from your investment strategy we would need to understand what that would mean in terms of the kind of medium and longer term financial planning clearly the onus would come back to the employers through enhanced contribution rates and that clearly during a time of difficult financial settlement places greater burdens back on to the local authority which again impacts on front line services so when we have to kind of wear two hats if you like I think Kevin kind of Mr Stewart earlier kind of indicated that as you try to bring the two together there are clear impacts from making or restricting the level of types of investments that the funds could make so from that perspective there's a weighing up of that clearly if I'm wearing my director's of finance hat then I'd be coming back to the Scottish Government saying if you're going to restrict the level of investments I can make here then you'll need to increase my funding within my settlement so that I can actually afford to pay a higher contribution rate back into the fund so it's about trying to get that correct balance so whilst I understand the kind of ethical arguments fundamentally the some of the strong performers and strong yielding investments that we have are in the very areas that you potentially might want to preclude so so tight Mr Mackindor please I don't think of all that much to add to that I struggle to see how the regulations would change to allow us to accept a lower investment return by taking other considerations it seems a slight distraction from the focus of the fund on paying pensions clearly allowing us to do that we have knock-on consequences primarily in the employer contribution rate which is the balancing element in the funding equation I think you've opened up a can of worms Willie Are those who make pension contributions like me ever consulted and asked about whether I agree with the investments that are made on my behalf surely the pension funds belong to the people that make the contributions not the fund managers Is that a way to overcome this difficulty that you have if the people that make the contributions to the pension funds ask that we don't do this or don't do that Mr Smale Yes in so far just very briefly in so far as employees are represented on the fund or so under the new governance arrangements going forward Mr White Mr Smale has answered the question I agree with that In the Scargo case it has been mentioned after the Scargo challenge the fund manager in terms of Mr Mackendo's example where Glasgow City Council has taken a decision to disinvest in fossil fuel industries you can clarify where a local authority takes a decision is it the fund managers that make the final decision whether or not to endorse or to implement a policy of the council because councils could like the convener said have a policy to disinvest from the armaments industry but the fund managers can then override that decision Very briefly Mr Mackendo The council has decided to commission a report to investigate disinvestment from fossil fuels that report the council agreed will go to the Strathcly pension fund committee so it will be a pension fund decision whether to implement or not Not the fund managers but the actual fund panel members will make that decision which consists of just for clarification how many councillors 8 and how many others 9 8 The committee itself is the councillor Thank you convener I just want a little bit of clarification around the area of questioning Mr Stewart had earlier on about political will within the council and how that conflicts because I think I'm quoting you correctly Mr Mackendo will say that it's the politician to make the decision but then Mr Smith won't want to say about his hats and the pension fund being a separate legal entity in the case that the councillors when they make these decisions leave their political hats at the door and that they're acting only in the interests of the pension fund Mr Stewart I think strictly speaking the fiduciary responsibilities of the member and I think to this extent we draw heavily on actual trustee law albeit it doesn't directly apply but heavily colours interpretations so they should be acting in the best interests of the members of the fund but we live in the real world and it's difficult to imagine as human beings that one can completely divorce one's political hat and I don't think that's necessarily a wrong thing but it is a difficult balancing act to manage I would suggest Mr White please My understanding is that they shouldn't be wearing a political hat whilst they're making decisions I can't answer for them individually whether they do that or not but that is my understanding what they should do Mr Macindoe That's my understanding of what they should do that's been my experience of what they do that's probably become more difficult to do because I think pensions have become rather more politicised than they were in the past a smile alluded to to set that aside but yes they are there is a large degree of separation between the pension fund and the rest of the council Thank you Thank you very much gentlemen for your evidence today I now suspend and we move into private session Thank you