‘Heroic effort’ needed on LGPS infrastructure wealth fund timetable

InfrastructureThe Government’s ‘aggressive timetable’ for the pooling of Local Government Pension Scheme (LGPS) investments demands ‘heroic efforts’ of authorities, which should not rush into infrastructure investments that are currently too expensive say experts.

Wednesday’s Autumn statement included publication of guidance on proposals for the pooling of LGPS assets into up to 6 British Wealth Funds, containing at least £25 billion of Scheme assets each, to drive investment in infrastructure and growth. The Department For Communities and Local Government (DCLG), which published the guidance, wants to see initial proposals for how assets can most effectively be pooled by February and final detailed proposals by July.

Sackers associate director Ralph McClelland says the new regulations include new powers for DCLG to intervene where it believes its powers are not being followed.

Hymans Robertson cautions that currently available infrastructure investments are largely not suitable at present because of their high cost and the returns they offer generally do not match the liabilities they are seeking to match.

McLelland says: “The Government is pushing ahead with its proposed “British Wealth Funds” on an aggressive timescale. Authorities are clearly already working hard to introduce pooling arrangements and these proposals will require them to provide a lot more specific information to DCLG relating to how they are going to achieve the Government’s objectives.

“We will be watching with real interest how DCLG chooses to engage with authorities in exercising these powers once they are in place. The Pensions Regulator has been criticised for lacking teeth. DCLG’s actions over the next 12 months will tell us a lot about whether it’s going to choose a more interventionist path.

“Having worked on a number of recent large scale asset transition projects, I suspect that heroic efforts will be needed from the LGPS if the proposed timescales and outcomes are to be delivered.”

Pensions and Lifetime Savings Association chief executive Joanne Segars says: “We support the development of pooled investment vehicles that generate economies of scale and enable smaller LGPS funds to access new and novel investments. It is critical that the proposals for pooling help in the ultimate aim of the Scheme, securing members benefits. And they can only do so if these proposals improve the governance of the Scheme as a whole, and its investment in particular, so we welcome the specific inclusion of a ‘strong governance’ criterion.

“That said the timetable for submitting proposals is tight. We are committed to working with our members and the Government to ensure the outcome supports the long-term sustainability of the Scheme.”

BNY Mellon European pensions and international insurance segment leader Paul Traynor says: “We believe the announcement that Local Government Pension Schemes will be pooled into six “British wealth funds” will help drive down administrative costs, increase Councils’ purchasing power and skillsets, and enable them to invest in more diverse projects or opportunities such as infrastructure. Reducing the cost of provision could benefit the council tax payer and help improve the funds’ returns which would be good for the Councils’ employees and retirees.”

Hymans Robertson head of public sector John Wright says: “It is important to establish first what should be done but allow funds time to figure out who they should pool with.

“Some funds are making progress with the “who” as well but it is right that the timetable allows some leeway for funds to work out the right groupings and partnerships to get the best outcomes for the long term. The timetable makes some allowance for this with initial proposals in February and final detailed proposals by July, but we should remember that the aim should be to identify the best proposals for the long term and taking time to get this right will pay dividends in the future.”

“Some infrastructure investment is appropriate and attractive for pension scheme liabilities but the costs of investing in infrastructure are too high currently, and the supply of, and access to, the type of infrastructure investment LGPS funds need – assets generating income streams linked to inflation, is limited. In that context it makes sense to explore ways of making it easier and less costly to invest in the kind of infrastructure LGPS funds need and want.

“It would be wrong to mandate how much local government pension funds invest in infrastructure – it is important that funds are able to invest in a range of different investments including stocks and shares, property and government bonds in the UK and elsewhere to deliver the best outcomes for pension scheme members and employers who pay contributions.

“Currently around 1 per cent or £2bn of local government pension fund money is invested in infrastructure. We expect the amount of money invested in infrastructure will increase when pools are created to enable local government pension funds to invest in infrastructure more easily and cost effectively.”