Infrastructure investments unlikely to stem from merging London council pension funds, expert says

Earlier this week the Financial Times reported that plans for "the creation of a London Pensions Mutual, as a pan-London investment fund" had been presented to council leaders at a meeting organised by umbrella body London Councils.

The merger of funds could see up to £30 billion of assets pooled together from more than 30 London councils with up to around £2.25bn of the pot being used for investing in infrastructure, according to the newspaper's report. 

A business body has welcomed the councils' discussions and said the UK was "crying out" for finance of infrastructure. However, pensions expert John Hanratty of Pinsent Masons, the law firm behind Out-Law.com, said that whilst the plans should be "cautiously welcomed" the funds would be unlikely to be used for infrastructure investments.

"The proposal to merge the London Local Government Pension Funds appears to work on a number of levels and should be cautiously welcomed," Hanratty said. "However, there are potential pitfalls: the funding levels of the schemes are all different and how would a member of a well funded section feel about subsidising the less well funded sections, or how will council tax payers whose authority currently pay 15% which suddenly sees its pension contributions rise to 17%, feel?"

"If the intention behind the merger is purely to obtain investment benefits then the funds could use a pooled investment vehicle which could provide the opportunity to benefit from the investment economies of scale," he said.

"However, talk of allowing the fund to invest in infrastructure seems to be a bit of a red herring. The amount the combined fund could invest is not huge in infrastructure terms and the Government is really seeking to attract infrastructure investment from sovereign wealth funds and the mutual funds from the US, Canadian and Australian pension and insurance pots."

The Confederation of British Industry (CBI) released a statement earlier this week backing the London councils' talks on merged pension funds.

"These discussions are a welcome move, as pooling local government pension funds would not just reduce administrative costs it would also inject some much-needed investment into Britain’s ageing infrastructure, which is crying out for capital," Katja Hall, CBI chief policy director, said.

"Pension funds are natural investors in infrastructure and will want to invest in projects that are designed to give returns, so we now need to see other public sector funds coming forward in this way," she said.

Hanratty said talk of London councils pooling pensions funds does fit in with an overall move by local Government to streamline fund operations.

"The Centre of Policy Studies along with a number of leading council leaders have been promoting a consolidation of the administration functions of the Local Government Pension Scheme (LGPS) to reduce the costs of running the LGPS generally," he said. "This follows on from the report prepared by the All Pension Group for Unison earlier in the year which projected that the LGPS could generate savings of some £1.2 billion by reducing the number of administering authorities to 14."

"This also ties in with the trend we have seen to authorities setting up shared service arrangements to benefit from the economies which can be seen from sharing services. The recent back office collaboration between Kensington & Chelsea, Westminster and Hammersmith and Fulham is a really good example of this," Hanratty said.

Chancellor of the Exchequer George Osborne's budget last month said that the Government would support a formalisation of investment by UK pension funds in UK infrastructure projects.

"The Government will support the establishment of a new Pension Infrastructure Platform owned and run by UK pension funds, which will make the first wave of its initial £2 billion investment in UK infrastructure by early 2013," the Budget Report said. "A separate group of pension fund investors has also presented proposals to the Treasury for increasing pension plan investment in infrastructure in the construction phase."