Ritchie just loves a bad idea, doesn’t he?

The new leader of Birmingham city council wants to create a “West Midlands sovereign wealth fund” that will invest the region’s public sector pension funds in new homes and infrastructure.

John Clancy, elected at the end of November, said he wanted to take the £11bn West Midlands local government pension fund, the third-largest local authority fund in the UK, and pour it into Birmingham and the surrounding region.

1) You want diversity in pensions funds. So no, you don’t invest the lot in the same place where the people live and work.

2) How is there going to be a return from those investments in housing and infrastructure? Rents? User fees? OK, that’s fine: now, now you’ve got that revenue stream associated with that investment why do you want to fund it purely from the pensions of the people who live in the area? Why not allow anyone to invest?

49 thoughts on “Ritchie just loves a bad idea, doesn’t he?”

  1. As has been seen time and time again, it’s a bad idea to allow the executive managers of an organisation any access to that organisation’s pension fund.

    And add another order of magnitude for him being a politician and several more for the LHTD approving.

  2. Too many people seem oblivious to the fact that the whole purpose of a pension fund is to generate a continuous ongoing income.

  3. Bloke in North Dorset

    @jgh

    That should be …

    “Too many people seem oblivious to the fact that the whole purpose of a pension fund is to generate a low risk continuous ongoing income.”

    And it seems to me that this idea is definitely not low risk given the susceptibility to political risk eg what happens to non-payers? They’re hardly likely to be thrown out on to the street.

    And if there’s a constant low risk income stream why not let the market deal with it rather than risk public employees pensions?

  4. Disgusted Of Tunbridge Wells

    Can there be any justification for this?

    It seems to me that if you need to force the pension fund to invest, then it’s a bad deal ( low returns for high risk ), which means the pension investors are getting a bad deal. If it’s a good deal ( high returns for low risk ), you don’t need to force anybody to invest.

    I know that’s kind of Tim’s point, but I wonder if there’s anything more to it than that?

    Is it just because “pensions good, markets bad”? Surely not.

  5. If it’s just the public sector pensions, why not let Birmingham’s parasites be the guinea pigs? Make it clear there will be no bail-outs, the return on the investments will be the sole income source.

    Then when it goes spectacularly tits-up, some lefty twats might learn something.

  6. “John Clancy, elected at the end of November, said he wanted to take the £11bn West Midlands local government pension fund, the third-largest local authority fund in the UK, and pour it into a big hole in the ground.”

  7. Well, I have to say I think they’re on the right track here. This is similar to the approach that they use in Singapore and other countries to fund things like housing, as well as pensions, healthcare(NA in UK), and other things too.
    So, I don’t hate the idea. In particular I’d really like to see something like this replace Disability benefits. Getting it right out of Westminster and making it much more tailored individually to need.
    Of course the problem is that these pension funds are already allocated for retirees and so they can only morally use surpluses over and above what’s already estimated to be the defined benefits. Overfunded in other words. Then it would make sense to do something in housing say. That way in effect the local taxpayer is getting lower rents lets say in economic terms and is better off. If housing is directly provided then low income people may get an affordable rent (say for current HB recipients) and possibly even a leasehold mortgage (like in Singapore).
    So, not a terrible idea. Being the glorious British Public Sector of course then we’ll find a way to completely Bollox it up.

  8. It’s entirely consistent though with the idea that if you move money around fast enough it will look like there’s more of it. Many of us do exactly that with our Visa bills and other debts 🙂

    As SE says, no executive position holder (or adviser to such) should ever be access to pension funds. It’s just way too tempting a pot of money. You just talk about the investment in the local area (or your own company, in the case of Enron), and bingo, there goes your deficit/loss.

    I did like this inadvertently honest line, and especially honest verb though.
    John Clancy… said he wanted to take the £11bn West Midlands local government pension fund… and pour it into Birmingham and the surrounding region.

  9. It’s corruption, plain and simple.

    Here’s the current situation:

    Private investor: “Can we build ten thousand new homes in the abandoned factory district, rent them out at market rate, and return the income to our investors?”
    Council: “Certainly not! You can build three homes, of which five must be “affordable”; and you must give the council a bung – sorry, a section 106 payment – worth millions; and you must hire my cousin’s construction company.”

    Here’s their new plan:

    Council’s pension fund: “Can we build ten thousand new homes in the abandoned factory district, rent them out at market rate, and return the income directly to you when you retire?”
    Council: “Of course! You can build anything you like, anywhere; we’ll even move our best-behaved tenants into the new homes, so that our investment is safer.”

    To be fair it might actually be better for residents; but that’s an indictment of the existing system, not a recommendation for their new plan.

  10. But Rob, that’s precisely the problem. Public pensions aren’t private possessions. They are promises. They may be funded, partly funded, or unfunded. But they are still just promises, and like any promise, they can be broken.

  11. @AndrewM

    That’s an appealing scenario (the second one, the first was how things were done up until the Housing Act 1990 and the advent of schedule 1). It’s arguably how things should be done in terms of treasury/ long term investment- rather then depositing it in Icelandic banks.

    The drawback is whether:

    The ROI meets the funds requirement (or does it do a better job of it than the current arrangement)

    Or

    One minds about the fact this is perpetuating the current social housing issues- state provision never meeting the need established by providing homes for those who cannot afford them under the current mixed tenure model.

  12. Surreptitious Evil

    A nice point. You will be ever so slightly uncomfortable to read this then from Ritchie’s comments;

    Comment: “John Clancy had already met Greg Clark, the communities and local government minister, to discuss his ideas.”
    Surely if it is Brum’s pension fund he doesn’t need to discuss it with central government – can’t he just do it? Or is its management is forcibly contracted out?”

    To which Ritchie replies:

    “The pension fund might claim it should not invest locally as it concentrates risk”

    Just in case the fund managers didn’t rate the investment, a bit of Courageous State compulsion to back it up.

  13. This meanwhile is priceless (in contrast to the bonds, which are valueless):

    Comment; “These bonds are going to be used to fund investment in physical assets – and I have no problem in principle with that. What I don’t know, and it hasn’t been made clear from your article, is how these assets are going to be used to repay the coupons and principles on the bonds issued. Can you clarify this please?

    Obviously, if there is no underlying plan to secure payments for the bonds, and the bonds themselves are not secured against assets, then they are near worthless.”

    Richard Murphy says:

    “Repayment comes either out of yield (housing, energy, innovation investment) or future taxes (education, NHS, etc). Much cheaper than PFI.”

  14. “Repayment comes either out of yield (housing, energy, innovation investment) or future taxes (education, NHS, etc). Much cheaper than PFI.”

    The second part doesn’t make sense. Does he mean if the investments don’t yield an income the taxpayer will provide it instead? If so, what does the “(education, NHS, etc)” bit mean?

  15. Rob

    So it doesn’t make sense; welcome to Ritchieworld.

    I think he means (only think; don’t know) that any shortfall in income* will be made up from taxes. The ‘education’ ‘NHS ‘ could just be his infinite capacity to type words words and more words.

    Thing is, how can Birmingham City Council access national taxes? Is he basically trying to devise a scheme to let Labour councils run riot at the expense of future taxpayers? I ask because Jeremy Corbyn wrote an article in the Times (whole sentences with full stops and everythibg) in which he spoke of “enabling” future generations to share in the investment in the environment, social infrastructure, all round good things.

    *I laugh at the thought the shortfall isn’t an absolute given.

  16. Ironman said:

    Just in case the fund managers didn’t rate the investment, a bit of Courageous State compulsion to back it up.

    If the pension fund might see local funding as too concentrated the compulsion may be in the form of getting Birmingham pension fund to invest in some other authority and that other authority investing in Birmingham.

    Matching public sector pension funds with public sector investment needs – there could be an app for that… Griftr? Crapstarter?

    Rob,

    I’m guessing you replace the Private in PFI with Pension in order for it to make sense. The pension funds pay for new school’n’ospitals. But he seems to think the pension fund will accept a lower return than private finance.

  17. @John square,

    It’s an appealing scenario for retired local authority workers; but it’s rather unfair for any other pension fund who gets crowded out of that market.

    Worst of all, it creates a terrible conflict of interest. Birmingham Council can grant planning permission to its own pension fund, while rejecting planning permission for anyone else. The planners will approve any old rubbish as long as it makes them money. Before you know it we’ll end up with Soviet-style concrete towers. It’s hard to see how this doesn’t end badly.

  18. @AndrewM
    “Worst of all, it creates a terrible conflict of interest. Birmingham Council can grant planning permission to its own pension fund, while rejecting planning permission for anyone else. The planners will approve any old rubbish as long as it makes them money.”

    To be honest, that’s never been my experience- God knows why though: you would have thought the temptation would have been overwhelming to greenlight a scheme that directly benefits the LA.

    “Before you know it we’ll end up with Soviet-style concrete towers. It’s hard to see how this doesn’t end badly.”

    That’s passe: it’s all CAT6 eco homes now: ego led low density projects. I think the post slum clearance dalliance with high roses have poisoned that we’ll for social housing. Which is a pity, because high rises would sort London housing issues in a couple of years. Just in the way it has everywhere else on planet earth.

  19. For those who care to step through he looking glass, Ritchie has now basically said that, yes, it will be central taxes that pay for the shortfall.

    So in essence it’s yet another call for spend now; tax not long after. Just like like People QE actually is when you drill down, just like every brilliant idea he ever has.

  20. Two questions.

    Cui bono? By which I mean there will be a skim, there always is, who will get it and how does Murphy think he’ll get some?

    Is there any way to short sell this deal?

  21. @Fred Z,

    As outlined above, the existing house-builders get shafted under this system. So you could short them. But hold your fire – this is merely a Ritchie proposal, i.e. it’s never going to happen.

    @John Square,

    I agree that Singapore proves it’s possible to have decent public-sector housing. But they’ve gone to the opposite extreme – something like 80-90% of their housing is state-owned and managed. In Britain we’d be in danger of erecting more barriers to entry for private housebuilders. As per my example above, local authorities will not only grant themselves planning permission, but actively deny it for everyone else. It might be illegal; but most builders can’t afford a protacted legal battle. As a result the state becomes the only housebuilder. Some (e.g. Ritchie) think that’s a good thing. I don’t.

  22. Rob

    Got any money saved for your retirement? Well it’s actually my ‘sovereign wealth fund’ so I’ll have it thanks very much. Yes, I was that big lad that took your dinner money every Monday at Aston High all those years ago; you remember me! I lead the city council now.

  23. He’s taking the Lin Homer approach so by the time everybody realises its a bad idea he’ll be three or four jobs further up the food chain
    Money is easy to spend if you don’t have to earn it

  24. @ John Squyare
    High rise can only solve London’s housing problem *after* we repeal Attlee’s planning Act which limits the number of dwellings per acre and is the reason for the acres of empty space around the towerr blocks.

  25. The Homeowner Lobby will never allow the repeal of the Soviet Planning System. Every middle class Tory turns into a red flag waving communist when it comes to land.

  26. The West Midlands has form with this sort of thing. The local RDA (Advantage West Midlands) spent nearly all of its’ money on buying bits of Longbridge to prop up MG Rover. Nothing left for start ups, development etc (travel & entertaining budget maintained, obviously)

  27. “Every middle class Tory turns into a red flag waving communist when it comes to land.”

    What on earth are you talking about?

  28. It’s the thin wedge of the usual LVTer nonsense.

    Wait a few minutes and DBC will be here to tell how wrong we all are.

    At least, just about, it’s not MMT.

  29. Ironman

    What on earth are you talking about?

    It’ll be one of his ‘theories’. ‘Neo-progressivism’ and Puritanism may well feature.

  30. This is only what is happening nationally set on a smaller scale. George Osborne is forcing the local authority pension funds to band together so that they are big enough to “reduce expenses, share expertise and… invest in national infrastructure projects”..

    Technically they (the LGPS members) don’t have trustees (they are set up under special legislation). They are run by a committee composed of councilors and union reps (plus an external chair, I think. God help us.

    They are contributory, so the beneficiaries have actually paid something ( a fair bit these days) for their pensions.

  31. I actually laughed out loud at “Repayment comes either out of yield (housing, energy, innovation investment) or future taxes (education, NHS, etc). Much cheaper than PFI.”

    But hey, it’s not my pension… and I’m hoping if I steer clear of Brum, then it won’t be my taxes.

  32. > ““Repayment comes either out of yield (housing, energy, innovation investment) or future taxes (education, NHS, etc). Much cheaper than PFI.”

    Still trying to understand how “investing” in the NHS today can generate greater tax revenues in the future.

  33. Andrew M

    “Still trying to understand how “investing” in the NHS today can generate greater tax revenues in the future.”

    If I remember my history lessons properly, when the NHS was first set up it was expected to pay for itself – once people who had previously not had access to doctors were able to get medical care, they would get healthier, and then not need so much care, so the NHS would need less money over time. Moreover, now that the population was healthier it could do more work, so increasing tax revenues.

    A very fine theory.

    [I’m curious whether this was seriously believed by the mandarins or is something of an urban legend. But there are people who believe similar things today, and see NHS spending as basically self-funding.]

  34. Still it sounds better than an idea floated in my part of the world to have a 1.5% property surcharge which is deductible against income tax.
    The idea is that it will force foreign owners of vacant property to rent out the property so they have a tax liability to offset the tax against. It’s floated as part of affordable housing so I assume the assumption is that the increased supply of million dollar and above condos into the rental market will bring down overall rents. Alternatively it could be intended to discourage foreign property buyers who are seen as a key cause of rising property prices by making property more expensive for them.

  35. I lived in Bridgend for 7 years and I’m not Welsh. Does that make me one of those ‘foreign’ owners the Welsh think are destroying the purity of their nation?

  36. BniC

    The big scare in Australia is about Chinese investors buying property. Apparently by buying off the plan apartments they are driving up prices. I don’t see that myself. Aren’t they providing foreign investment and more stuff is getting built? I thought that would be a good thing.

    There is also some activity of this sort in upper end (really upper, $20 mil territory) properties being purchased by people of the Chinee persuasion. I don’t really care what goes on there, but it makes for good headlines.

    There appear to be two drivers to all this – parents buying units for their kids to live in while they study, and also a lot of Chinese investors wanting to stash some income producing wealth outside their country. And who can blame them.

    Unfortunately no one really cares about renting affordability here. It’s all about owning a home. So investors boosting the rental stock, but in the short term bidding up land prices just pisses them off.

  37. No Ironman it doesn’t make you welsh, but 7 years in Bridgend means you have my sympathies.
    I was referring to Vancouver actually (which has the same issues as the Australia post mentioned) though coincidentally I am originally from the same area as Bridgend. Took my driving test there many years ago, I think the best description of Bridgend I’ve seen was that it was somewhere to stop between Cardiff and Swansea, but only if you were desperate.

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