It’s time for local authority bonds – the ultimate safe haven

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My good friend and colleague Colin Hines had the following on the Guardian blog today:

Pity the poor pension fund manager charged with putting his punters' savings in a range of investments to provide an adequate and secure income over time. Perhaps purchase an office block or two? Some juicy shares in the bouncy ball that is now the stock market?

Yet there could be another far more secure and socially and environmentally beneficial haven for pension funds - local authority bonds. These were once used to build the civic infrastructure and utilities of our cities and indeed they were a common source of public finance until the Thatcher government began the era of constrained local financial independence and increasing centralised economic control.

There are no legal constraints on local authorities raising bonds, but it has not been encouraged by governments since the 1980s. However this changed when an important precedent was set whereby the Treasury authorised Transport for London (itself a local authority in legal terms) to issue £600m of bonds as part of its borrowings to improve transport infrastructure. These were snapped up by big investors.

This idea was first raised some time ago in the report People's Pensions, published by the New Economics Foundation (NEF) but it is even more timely today given the rising unemployment and business collapses inevitable in the wake of the credit crunch. This could be substantially reversed should even a small part of the at least £1tn in private pension schemes be invested into such bonds for public infrastructure. The proven economics of reducing energy use through efficiency, combined heat and power and renewables for buildings make it an excellent choice for funding by such local authority bonds. Part of the savings would fund the repayments due on such bonds. This form of infrastructural investment is also crucial to reducing fuel poverty and tackling climate change, since buildings are responsible for 40% of the UK's carbon dioxide emissions. The final advantage is that this approach could provide a much more stable pension environment, thus encouraging people to put more money into their pensions, and could help close the "savings gap" in the pension market.

The lead could be taken by the country's largest local authority, Birmingham, which has a proud history of the use of local authority bonds in developing the city in the last century. It is now the biggest landlord in Britain, owning more than 80,000 houses and flats. Many of these are in need of repair and are energy inefficient. There is nothing to stop Birmingham city council following the example of Transport for London and launching a "Brummie bond". This could fund a "carbon army" of local employees to crawl like ants over its entire housing stock, making it energy tight, warmer and cheaper to heat. Renewables such as solar electricity and water heating and larger scale combined heat and power systems would all provide business opportunities in the area.

Now is the time for the pensions and savings industry to start lobbying for government encouragment of the widespread use of local authority bonds. They are already legal, Transport for London have shown the way, and it could at last give one section of the finance industry a chance to show its social responsibility and its commitment to nurturing the real economy as well as the environment.