David Blackman explores why a council pension fund has entered the lending business

Amidst a largely stagnant economy, Cambridgeshire is a rare beacon of growth. However, the county’s firms have just as many problems accessing finance as their counterparts across the UK.

Cambridgeshire

Step forward the county council’s pension fund, which has set up its own bank, the Cambridge & Counties, targeted at the lending needs of small- and medium-sized enterprises. As the new bank celebrates its first anniversary, Scheme Insight went to Cambridge to find out why a council pension fund has entered the banking business and whether it makes fiduciary sense.

Cambridge & Counties emerged out of the Pensions Bank, a small Leicester-based institution that held deposits from self-invested personal pensions and small self-administered schemes. Cambridgeshire and Cambridge University’s Trinity College both got wind that the bank’s sole shareholder wanted to exit the businesses.

If you are investing your money, you look for a catch. We couldn’t find one, so it left us with little alternative but to go for it

Cllr Steve Count, the chairman of the pension board that oversees Cambridgeshire’s fund, says the scheme’s interest was quickened by the low returns on offer elsewhere. “Traditional methods were not giving us the returns we required,” he says. “If you are investing your money, you look for a catch. We couldn’t find one, so it left us with little alternative but to go for it.”

The pension fund has so far committed £4m, with up to £18m allocated in total, barely 1% of its £1.8bn total assets under management.

CONVINCING THE SCEPTICS

However, at a time when – post-financial crash – the very word ‘bank’ was mud, the council had its work cut out convincing sceptics that setting up a bank was a sensible use of pension scheme members’ funds.

“There was a certain amount of risk for the-then leader Nick Clarke,” says Count, “but we felt this was a good deal for the people of Cambridgeshire and the pension fund.

“We were entering an area that was unexplored: we saw it as an opportunity investment.” Seeking a return was not the sole motivation for setting up Cambridge & Counties, though. The other key objective was to “benefit local communities”, according to Gary Wilkinson, the bank’s managing director.

Not only will it give a return back to the pension fund, it is helping investment in Cambridgeshire

“Not only will it give a return back to the pension fund, it is helping investment in Cambridgeshire,” says scheme manager Steve Dainty. The bank offers refinancing loans to companies that the big banks, despite their claims to the contrary, are increasingly “unwilling or unable” to provide, says Wilkinson.

“Research suggested that there would be a demand for this when bigger banks are pulling back lending. There is a strong demand out there,” he adds. The bank’s business development efforts have been concentrated on what it describes as its heartland counties of Cambridgeshire, Northamptonshire and Leicestershire, an area that will soon be extended across the East Midlands and East Anglia.

If we weren’t around to refinance a loan that has expired, there could be some disastrous consequences for those particular businesses

The bank offers secured loans to small and medium sized enterprises, from one man bands upwards, that are able to offer property as collateral.

Count says: “[The secured lending] enabled us to convince investors that it was a well-thought out and secure plan, although it was an opportunistic investment.” The bank has expanded rapidly in the past year.

The number of staff has tripled to 30 over the past year and it looks set to achieve its four-year lending target in under half the time originally planned. Wilkinson says: “If we weren’t around to refinance a loan that has expired, there could be some disastrous consequences for those particular businesses.”

This will give a return on equity that will compare extremely favourably with other companies. We expect to be profitable by the end of this year

But will the initiative pay off for the Cambridgeshire scheme’s members?

Wilkinson argues that the bank is a good bet: “This will give a return on equity that will compare extremely favourably with other companies. We expect to be profitable by the end of this year.”

Count says: “The speed with which this has taken off has pleasantly surprised us at Cambridgeshire. It looks very favourable going forward.”

TACKLING THE DEFICIT

However the scale of the banking initiative means it can only make a tiny dent in Cambridgeshire’s deficit, which stood at £555m at the time of Cambridgeshire’s last triennial valuation in 2010.

This picture didn’t improve much in 2011-12 when the fund achieved a return of 0.5%, well below the 2.6% benchmark for the local government pension scheme as a whole. Dainty puts the poor performance down to a combination of poor manager selection and a failure to give the pension fund its due importance.

Ever since Maxwell decided to take his yacht out that sunny day, things have changed

“The members of a pension committee were put on there because they couldn’t find somewhere better for them: that has now been turned on its head. Ever since [fraudster Robert] Maxwell decided to take his yacht out that sunny day, things have changed,” he says.

To bolster the scheme’s governance, Cambridgeshire has forged a groundbreaking shared services partnership with the neighbouring authority of Northamptonshire. Instead of merging the two funds, like the London Pension Fund Authority is pushing for in the capital, the Cambridgeshire and Northamptonshire funds have decided to save costs by pooling their administration.

The two funds do not yet share the same fund managers, although Dainty hopes this will be possible if they can establish a joint custodian arrangement later this year as planned.

THE BENEFITS OF TEAMWORK

As part of this overhaul, which has led to the establishment of a joint administration centre in Northampton, a joint pensions board has been set up to oversee the two funds. The members have all been sent on courses run by the public sector accountancy body the Chartered Institute of Public Finance and Accountancy.

It’s a bit like turkeys voting for Christmas

“I can’t believe how much time members are spending on pensions matters now, which is the right thing,” says Dainty, who believes shared administration is a better way forward than wholesale merger. He believes such tie-ups are unlikely to find much favour in local government. “It’s a bit like turkeys voting for Christmas.”

Click the picture on the right to see the pension fund’s asset allocation

And he argues that his own joint venture has proved that it is possible to achieve cost savings while maintaining independence. Count agrees that wholesale merger is unnecessary. “I’m not sure there are many restrictions on us with £1.8bn – and that we could do a bit more if we had another £1bn. I’d be worried that if you were part of a larger fund you would lose all meaningful control.”

If you could save huge amounts on back office and you were guaranteed to save money or if the fund was not big enough then I would go for pooling

However, Count’s mind is not closed to the benefits of merger. “If you could save huge amounts on back office and you were guaranteed to save money or if the fund was not big enough then I would go for pooling,” he says. In the meantime, however, like the rest of the local government scheme, Cambridgeshire faces the triennial revaluation, which kicked off in May.

Dainty says the government’s recent shake-up of the Local Government Pension Scheme will only have an incremental impact on his scheme’s funding levels. Any savings achieved via the reforms are likely to be wiped out by the government’s decision to end contracting out of National Insurance contributions for defined benefit schemes.

The strength of training and the board means that we understand the issues and can do something about it

Count says the fund has recently recorded some “cracking results”, and that the pension board’s internal governance changes mean that it is better placed than it was before. “The strength of training and the board means that we understand the issues and can do something about it.” However, he admits it will take a long time to get the scheme back on an even financial keel. “Whatever we do now, it’ll take five to 10 to 20 years to see the full benefits.”

Dainty agrees: “I’d be happy if our deficit figure was similar to 2010, I’m not expecting vast improvements, but I don’t think it’s the be all and end all. The period we are now is unique, and pension funds are in a long-term game.”