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One of Scotland’s largest public sector pension funds is suing an arm of US investment group Federated Hermes over claims it engaged in an “existential gamble” that wiped out millions of pounds in assets.
Aberdeen city council has brought the claim on behalf of the £6.3bn North East Scotland Pension Fund at the High Court in London over a soured investment in a portfolio of five Swedish wind farms.
The council argues that two Hermes entities that were paid to manage some of the pension fund’s assets allocated the wind farm stake to the fund’s “core portfolio”.
The portfolio was supposed to be for conservative investments intended to generate “highly assured, lower volatility returns” with “long-term stable and predictable cash flows”.
NESPF claims the investment, made in 2019, did not meet these criteria and was “highly risky”, exposing the fund to “substantial losses in a range of realistic scenarios”.
The court filing said that by September 30 last year, NESPF’s interest in the Swedish wind portfolio was worth only £17mn, down from a total investment of £104mn.
The pension fund is claiming damages for an investment loss of as much as £87.2mn in the portfolio.
It is also claiming damages for fees that it estimates are at least £2.5mn and the loss of return the fund could have made elsewhere.
“This investment involved an existential gamble on power generation risk and electricity price risk amongst other risks,” according to the claim.
The fixed-delivery obligations that the wind farms signed up to under power purchase agreements were “fundamentally unsuited to the variability of wind power generation”, making for an investment “which no competent infrastructure manager would have made”, Aberdeen city council said in its claim.
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The risks were exacerbated by the debt with which the wind farms were burdened, exposing the portfolio to an “unusually high risk of default”, the claim added.
NESPF manages £6.3bn of assets for 79,000 local authority workers and retirees in the north-east of Scotland. The fund has delivered an annualised return of 7.9 per cent over the past five years, according to its latest annual report.
Pittsburgh-based Federated Investors bought UK-based Hermes Investment Management in 2019, forming Federated Hermes, which manages $871bn of assets.
Federated Hermes and its lawyers at Linklaters declined to comment and no defence has yet been filed in the case. NESPF declined to comment.