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As the NAPF gathers for its annual conference, Crispin Derby considers the options for pension fund investments. The local government pensions aircraft is landing at the NAPF's Belfry conference strip next week, in the most turbulent conditions in history. There is no reassuring voice from the flight deck. The control tower has gone AWOL. And the attendants are frostily avoiding catching anyone's eye. It has been a year of appalling news on every front. The conference will face a raft of key issues, including: * responsible investing * efficient administration * better governance * new investment regulations * the ageing challenge * investment in difficult times * how to share costs better * falling fund valuations. This gives a platform for other really big issues which local government has to face. The biggest, which won't go away, is the huge imbalance between most public and private sector schemes. This is a subject requiring independent research before the perception of gross unfairness can be tackled seriously. At present, most public reports amount to comparisons of apples with pears. For example, an important story of high, top mandarin pensions gets undermined by contrasting their £60,000 annual pensions with the average £1,100. The unions often do the same obfuscation by quoting average public sector pensions of something in the £3,500 territory. Figures like these are accurate, but misleading. The average private sector pension is, apparently, £1,000 – an equally meaningless figure. What we really need to compare, though, is the average pension over a continuous career lifetime – 40 years perhaps – for people in the same salary brackets in public and private sectors. We must also take into account what they personally contributed, because there are huge variations. Part-timers and those with incomplete service need treating quite separately, because they will skew averages tremendously. The answers do not appear available at present, but it would be useful to know facts which are clear and honest, if this debate is to have any chance of an outcome with some consensus. There will always be people paid a great deal who will get very large pensions, in all sectors. Equally, there will always be those at the other end of the scale who will rely on benefits, because their pension is too small to live on. The vast majority of people are not in these extreme brackets, so the debate should move to being about them and getting a fairer system for the bulk of the workforce which doesn't exacerbate a public v private debate, based on averages and extremes. The other big issue that won't go away is how to invest the local government scheme in future. For the first time, it looks like almost every asset class has been hit so hard it has taken away the usual virtue of diversification. Not even cash is a safe haven when it is in Iceland. Another example is the unadventurous investors in plain old Lloyd's Bank shares suddenly finding they had unwittingly taken a huge gamble. But there are real dangers in all investing. Local authority funds have to take some risks, and get criticised if they don't speculate enough to get good returns. Every year, their investment returns are compared with the corporate sector and, of course, with each other. The big difference with the corporate sector is that it is less public than local authority funds. And this is no fun for the investment committee when local newspapers get hold of massive falls in fund valuations. But the fingers have been pointing at: * hedge funds * short selling * stock lending * credit default swaps and other derivatives * regulators' failure to spot fraudsters. Sadly, all sound, to the lay person, fairly risky activities for a staid local authority pension fund. Some have been temporarily banned, but all are part of the investor's armoury. One of the greatest issues is hedge funds, which some commentators have accused of causing many of the current problems. In fact, with considerable care, a number of local authority funds have engaged hedge fund managers for some time. I asked Alex Dolbey, of Fauchier Partners – which has eight local authority fund clients – what the concerns of local authority clients were at present. He said: ‘Their greatest concern was "headline risk". On a risk-return basis, the statistics for fund of hedge funds are compelling over any time period, but authorities understandably don't wish to have their names associated with any fund which is subject to fraud or other malfeasance. ‘That's why they value transparency and a strong due diligence team within their managers.' And that probably goes for any investment at present. Keep out of the headlines, keep the due diligence strong, and be absolutely clear how the investment works. Crispin Derby is a consultant and managing director of Crispin Derby Ltd

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FINANCE

Hedging their bets at the Belfry

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