Increased investment flexibility for council pension funds receives mixed reception

It has amended the rules restricting the ability of local government pension schemes (LGPS) to invest in partnership vehicles, increasing the cap from 15% of a fund's total assets to 30%. Funds will not be allowed to invest more than 5% of their total assets in a single partnership, to ensure that any risk is spread across different types of investment.

Partnership arrangements are the main type of asset vehicle used for major property, private equity and infrastructure projects. Announcing a consultation on the change late last year, Local Government Secretary Eric Pickles said that if every council chose to invest the maximum under the new regime, it would provide a £45 billion boost to housing, roads and high speed rail projects.

However, the amendment has received a mixed reception from the pensions industry. Although welcomed by industry body the National Association of Pension Funds (NAPF), LGPS fund managers have warned that the change will be "unlikely" to generate the level of investment hoped for by the Government.

Speaking to InfraNews (registration required), Dr Richard Bettley of the Devon LGPS said that the increased cap would have a "limited effect", as allocating more than 20% of investment to infrastructure would be "unviable" for most funds. Similarly, Mike O'Donnell of the London Borough of Camden Pension Fund said that "questions" remained regarding "the availability of good quality infrastructure investment opportunities in the UK".

However the NAPF, which had lobbied for the change on behalf of its local authority members, said that the change would create additional investment capacity for those funds that had already allocated the current maximum 15% share of their investment portfolios to property and private equity investments.

"Many local authority pension funds have told us that they are prevented from making the best decision on investments because of outdated rules which place limits on the amount that can be invested in infrastructure," said its policy director, Darren Philp. "So we are pleased that the Government has listened and has made this change."

"Lifting this limit will remove one barrier, but there are wider issues that need to be addressed. The Government needs to undertake a comprehensive review of the local authority pension fund investment regulations to ensure that funds can act in the best interests of their members and council tax payers. We are pleased that the Government has committed to exploring the possibility of wider reforms in this area," he said.

Last November, the Treasury signed a Memorandum of Understanding with the pensions industry agreeing to work together to help establish an efficient investment platform for pension fund managers. The Pension Investment Platform, which has had early support from the West Midlands Pension Fund and Strathclyde Pension Fund, is due to launch in the next few months.

"The proposal to increase the limit was never of itself going to stimulate the level of infrastructure investment - that will always depend on the quality of the investment opportunities available," said pensions expert Derek Stroud of Pinsent Masons, the law firm behind Out-Law.com. "However, the rule change does remove a potential technical blocker for LGPS fund managers making such investments in that some funds would have been reasonably close to reaching the original limit before making any such investments."