How Scotland could start investing in ourselves
Economist Jim Osborne discusses how Local Government Pension Funds could be a key anchor of Community Wealth Building in Scotland
In Scotland we need to invest in ourselves. Scottish Government policy depends too heavily upon foreign investment as the motor of economic growth and to develop and operate essential infrastructure. There is a role for foreign investment, but Scotland has become far too dependent upon it and a significant rebalancing is needed.
The big question is – where is the capital investment going to come from?
It is easy to bewail the lost opportunity that North Sea oil and gas provided to create a wealth fund. The opportunity has passed. There is, however, a large wealth fund in Scotland, hiding in plain sight.
It is the collective wealth that has accumulated over the last 50 years in Scotland’s Local Authority pension funds – the 11 “LGPS” (Local Government Pension Scheme) funds which today have a net asset value of almost £70 billion. Very little of this wealth constitutes investment in our own country.
What is stopping the LGPS funds from investing in Scotland?
One major obstacle is self-imposed. It is based on what pension fund managers believe to be their “fiduciary duty”. For a long time, this has been construed narrowly as to “act in the best interests of the beneficiaries” (the contributing members of the scheme). “Best interests” is also narrowly construed to mean “best financial interests”.
This narrow interpretation of “fiduciary duty” is what has led pension funds, including the Scottish LGPS funds, to pursue the maximum returns on the investment of their available funds and to the adoption of short term time horizons. Pension funds claim to be “long term” and “patient” investors but too often “long term” is no more than 5 years.
Thankfully, this narrow conception of fiduciary duty is being challenged, This has come about as a result of the failure of pension funds in general to disinvest from fossil fuels and other high CO2 industrial sectors and to reallocate funds to support the acceleration of decarbonisation.
Efforts have been made to amend the UK Pension Schemes Bill to incorporate a wider legal definition of “fiduciary duty” which will provide scope for pension funds to consider the long term impacts of their investment on the future wellbeing of their beneficiaries. This broadens the scope of the duty beyond a single focus on the monetary value of pensions. It includes issues such as the provision of infrastructure in the future which supports public services and the essentials of life which people rely on for their wellbeing, whether they be pensioners or anyone else; food security, housing, energy etc.
In November 2025 the Scottish Government published its outline plan for a Scottish Government Bonds Programme. The plan is to offer wholesale bonds to the financial markets. This, of course, continues with the policy of relying on overseas investors.
We need to invest more in ourselves and the LGPS funds have an important role to play. The SG could offer its bonds exclusively to the LGPS funds. The bonds could also be issued as “retail bonds” to the Scottish public.
It would be for the LGPS funds themselves to decide whether to buy the SG bonds offered to them. Their decision would be influenced by what they consider to be their “fiduciary duty”. Given the current fluidity with regard to what fiduciary duty means in the 21st century there is clearly considerable space for dialogue between Ministers and the LGPS to scope out
The terms of a bond contract which would be compatible with the LGPS principles regarding their fiduciary duty
To explore the scope of their fiduciary in light of current thinking about the appropriateness of maintaining a more traditional approach
Another dimension to the application of the law of fiduciary duty to public sector pension funds concerns how they are funded.
The pension contribution income of the LGPS funds comes exclusively from the public purse. Local authorities obtain their revenues from a combination of local and general taxation, augmented to a small degree by some local authority revenue sources (such as parking charges and fines, visitor levy, etc). As employers they pay employer contributions out of this public revenue and also deduct employees’ contributions from their wages and pay them to the LGPS funds.
There is, therefore, a compelling argument that LGPS funds should invest some of their funds back into the local economies and communities in which their workforce is based. The families of their employees have a direct interest in the impact of LGPS investment decisions. LGPS members (active workers, deferred members and pensioner members) total almost 25% of Scotland’s working population. Add to that their family members and something in the order of 25% of the whole Scottish population are affected directly by LGPS investment decisions.
The interests of 25% are no different from the interests of everyone in Scotland. LGPS funds have a fiduciary duty to us all.
This is of particular relevance in the context of the new Community Wealth Building (Scotland) Act 2026. There are 5 “pillars” (principles) to Community Wealth Building:
Plural ownership of the economy.
Making finance work for local places.
Fair employment and just labour markets.
Progressive procurement of goods and services.
Socially productive use of land and property.
The Centre for Local Economic Strategies (CLES) defines the finance principle as follows:
“Increase flows of investment within local economies by harnessing and recirculating the wealth that exists, as opposed to attracting capital. This includes redirecting local authority pension funds and supporting mutually owned banks.”
This clearly articulates the responsibility of LGPS funds to direct investment to support local economies. This CWB principle can also be applied to investing in national level CWB – LGPS take up of Scottish Government bonds is an important part of this.
Unfortunately, the CWB (Scotland) Act 2026 has not incorporated the finance principle as defined by CLES, nor as adopted in the SG’s “Cities & Regions” Policy, and has instead adopted a more opaque form of words, which reads:
“promoting access to investment opportunities that provide a benefit to the community and to local businesses” [CWB Act 2026 Section 1.3 (fa)]
Nor have LGPS funds been included in the list of “Public Bodies” and “Anchor Organisations”.
This is a serious omission. It needs to be rectified when Ministers issue the required “Community Wealth Building Statement” (CWB Act 2026 Sections 1-4) and the required Ministerial “Guidance” (CWB Act 2026 Sections 9-10). The principle should also be fully incorporated into “Community Wealth Building Action Plans” (CWB Act 2026 Sections 5-8).
Jim Osborne