IN recent articles we have suggested that the 11 local authority pension funds (LGPS) have the capacity to invest in the Scottish economy to support Scottish ownership of our resources, our businesses and our infrastructure and that capital should be provided to support productive activity and real wealth creation.

We discussed these issues in the context of food production, renewable energy and housing – three vital elements of what Believe in Scotland calls a “wellbeing economy” and the basis of three of the fundamental human rights of all citizens, which should be enshrined in Scotland’s Constitution.

It is now LGPS Annual Report and Accounts season and the performance of these pension funds over the year 2020/21 can now be seen in public. That is how it should be since they are funded by pension contributions which come from the public purse, including from council tax payers.

It is apparent that the assets of LGPS funds have increased by 25% during 2020/21. That is a remarkable outcome, but when considering that inflation in the real economy has been virtually non-existent, GDP growth in the UK has been flat and global GDP growth has been negative (-3.5%) we have to ask “what is going on here?”

The explanation is that LGPS and other pension funds are participants in a financial bubble. This is illusory wealth, not real wealth. When the financial bubble bursts these impressive looking numbers will rapidly go backwards and then there will be renewed public concern about the security of pensions and how we continue to provide pensions in the future.

The capacity to provide secure pensions for all citizens, over many generations, is wholly dependent upon the creation of real wealth – producing everything we need to live well and in harmony with nature, which right now means making a rapid transition to a zero-carbon economy. This calls for more investment in a diversity of real assets and providing committed equity capital to support a diversity of Scottish businesses, particularly in strategic sectors of the economy, and keep them in Scottish ownership.

By “committed equity capital” we mean staying the course and refusing to sell equity stakes in businesses for short term gain, as happens too often when a cash rich foreign corporation comes along looking for a takeover. Clearly, businesses that are failing to deliver what they were created for may need to be restructured or wound up, but if they are to support Scotland’s productive economy pension funds must act as loyal and reliable equity partners.

Investment in Scotland’s productive capacity is essential to sustain our monetary and political sovereignty so that we are not beholden to footloose global finance or foreign powers. Trust in our currency and maintaining its value is also dependent on the capacity of our economy for real wealth creation.

Local authority councillors play a key role in the governance of LGPS funds when they are appointed to pension committees. Scotland needs these elected representatives to set out new investment mandates, which their investment managers and other service providers are obliged to follow. The report in The National on June 24 (“Move to switch £4.15 billion pension fund to green investments”) illustrates how local councillors play a key role in setting pension fund investment mandates, but they need to be bold and be willing to challenge the dominant mindset which lies behind thinking of investment as trading in financial assets.

The skills and expertise that will be required for partnership based investment in real assets and in productive enterprise may well demand a transition. We know that there has to be a transition from fossil fuels to renewable energy and with it a new range of jobs and skills. The same applies to the financial sector. Those with the skills which belong to the era of investment in financial markets will need to re-skill for a new era of investing as partners in real assets and the productive economy.

Scotland will not be starting from scratch. There are already niche investment firms who are developing these skills and know how – we envisage that the financial sector transition we need will result in the expansion of this sector of Scottish finance.

Creating real wealth by producing the things we need results in the flow of revenues – people pay for the things they need. This is the source of the reliable cash flows which pension funds need in order to pay out pensions to citizens who have retired.

These are real cash flows from real assets and businesses which produce valuable goods and services, not speculative cash flows from speculative gains in the financial markets casino, where for every winner there is a loser. Financial markets are a zero sum game. Partnership investing in real assets and businesses means mutual gains for everyone – it will be a win-win game.