UK - Proposals by East Sussex County Council to use money from its local government pension scheme (LGPS) to establish a bank to help local businesses have been criticised as "utter madness" by the GMB.

The trade union said following the recent problems with the UK financial sector, and banks in particular, it "beggars belief" that East Sussex "thinks it should dive into the banking industry by setting up yet another bank with what is effectively its employees' money".

Brian Strutton, national secretary for public services at the GMB, said: "This is utter madness. We are talking about the LGPS' assets that have been built up to provide employee pensions and should be invested properly and efficiently. It is not a local politician's plaything. What they should be doing is concentrating on running core council services properly and not going off on flights of fancy."

A spokesman for East Sussex County Council, said: "East Sussex, like many councils, has been looking into a variety of different ways to help local residents and businesses through the recession.  One consideration is whether or not councils could create new bank-type institutions to help local small and medium-sized businesses access business credit more easily."

He noted the proposal is "in the earliest stages of discussion and any formal proposal would need to be properly worked through and a full business case prepared", which would need to show how all the investments would be protected.

The Council confirmed it would need to consult widely before any firm decision could be taken, and stressed that "if adopted, protecting the pension fund would be at the heart of this proposal. Established rules and safeguards, which determine what the pension fund could invest in, would need to be followed".

But the GMB's Strutton warned: "This is not dormant money that the council can use for any new idea that occurs to them. There are legal limits as to how pension money is invested and it is not in anyone's interest for these to be flouted. So the message must be ‘hands off' and stop this insanity before it gets off the ground."

He also questioned what would happen if something went wrong with the "Bank of Lewes" and whether the council would reimburse the pension fund, as Strutton claimed" "Lewes District Council are already crossing their fingers for the return of the £1m (€1.1m) they invested in Icelandic banks. Can the LGPS members and taxpayers of East Sussex really afford for their council to risk more of their money?"

East Sussex recently confirmed it had appointed Legal & General Investment Management (LGIM) to run a £275m specialist passive UK equity mandate, although it revealed it is still seeking two global equity managers for the scheme. (See earlier IPE article: LGIM picks up East Sussex mandate)

Figures from the pension fund's last annual report for 2008 showed the value of the scheme at 31 March 2008 was £1.68bn with a long-term asset allocation of 30% in UK equities, 38.5% in overseas equities, 11% in property, 12% in corporate bonds, 2% in index-linked gilts, and the remaining 6.5% in alternatives.

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