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. That 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 Local Government Pension Scheme (LGPS) funds which today have a net asset value of almost £70bn. Very little of this wealth constitutes investment in Scotland.
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 five years.
Revision of fiduciary duty
Thankfully, this narrow conception of fiduciary duty is being challenged. This is due to 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. ShareAction have published a briefing on this amendment.
More than just monetary value
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 future infrastructure which supports public services and the life essentials 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, is an extension of the policy relying on overseas investors.
We need to invest in ourselves
The LGPS funds have an important role to play in this. The SG could offer its bonds exclusively to the LGPS funds. The bonds could also be issued as ‘retail bonds’ to the Scottish public – see below.
It would be for the LGPS fund managers to decide whether to buy the SG bonds they are offered. Their decision would be influenced by what they consider to be their fiduciary duty. Given the current fluidity about what fiduciary duty means in the 21st century, there is clearly considerable space for dialogue between ministers and the LGPS to explore.
- The terms of a bond contract would be compatible with the LGPS principles regarding their fiduciary duty.
- To explore the scope of their fiduciary considering current thinking about the appropriateness of maintaining a more traditional approach and the implications of the new Community Wealth Building (Scotland) Act 2026.
LGPS pension funds are publicly funded
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 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.
Community wealth building (CWB)
This is of particular relevance in the context of the new Community Wealth Building (Scotland) Act 2026. There are 5 pillars (principles) to CWB
- Plural ownershipof the economy.
- Making finance work for local places.
- Fair employment and just labour markets.
- Progressive procurementof 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)]
Serious omission
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).
Retail bonds
As mentioned above the SG is planning a to issue bonds. The bonds will be issued in the financial market. This is inconsistent with the principles of CWB.
Instead, the government should issue retail bonds to the Scottish public, thereby keeping interest payments circulating in our own economy. Demand for them would not depend on the high level of interest demanded by bond markets, lowering the overall borrowing costs.
The bond contract terms would, however, need to include terms which would prevent bonds being resold in secondary markets. Anyone wishing to redeem a bond before its full term would have to sell it back to the government.
Investing in ourselves is a fundamental principle of community wealth building. If the Scottish Government is serious about CWB then all its economic policies need more ‘joined up’ thinking.
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