Out-Law News | 02 Mar 2022 | 4:45 pm | 3 min. read
Local government pension scheme (LGPS) investors and fund managers should work together to review how savings from the schemes can be redirected to new investments in local projects while delivering maximum return, experts in pensions investments have said.
The government’s ‘levelling up’ agenda is aimed at addressing “geographic disparities” in the spread of investment within the UK. In a white paper published earlier this year, the government acknowledged that this has had knock-on social and economic impacts for people and businesses in areas outside of London and the south east of England where much of the investment has traditionally been concentrated.
In its paper, the government highlighted the role that LGPS funds can play in driving fresh investment into local projects, such as infrastructure, housing, regeneration and SME finance, in areas outside the south east. The government said that “if all LGPS funds were to allocate 5%” of their funds to local investing, this would “unlock £16bn in new investment”. It called on LGPS funds, in tandem with LGPS asset pools, to “publish plans for increasing local investment, including setting an ambition of up to 5% of assets invested in projects which support local areas”.
LGPS investors need to have sufficient capacity and expertise to source and carry out due diligence on potential investment opportunities. For smaller LGPS investors, this may only be feasible by relying on the skills and resources of the investment team within their LGPS asset pooling structure
The Investment, Governance and Engagement Committee of the LGPS in England and Wales considered the government’s white paper at a recent meeting.
According to the minutes, the England and Wales LGPS’ Scheme Advisory Board Secretariat discussed the white paper with government officials and was able to clarify that the 5% target is “an ambition and was neither mandatory in scale nor a ceiling not to breached”. Having a levelling up plan to achieve that ambition will be mandatory, however.
The Secretariat was also able to clarify that the levelling up plans should set out how new investments will seek to achieve that ambition and that existing investments should not be counted. It further confirmed that the requirement to support ‘local’ areas is “not restricted to the backyard of the fund” and that “investments anywhere in the UK could be included in a levelling up plan”.
The minutes also revealed that LGPS funds can expect the government to release further details in relation to levelling up plans in a consultation expected this summer, which will also address “outstanding climate risk and reporting regulations, pooling guidance and incorporation of the 2019 CMA order requirement to set objectives for consultants”.
The Investment, Governance and Engagement Committee of the LGPS in England and Wales has been asked to recommend to the Scheme Advisory Board a brief response to the government’s white paper. The response is expected to be discussed at the Board’s scheduled meeting on 7 March.
Fund managers should be actively exploring with LGPS funds ways to optimise financial returns whilst increasing local investment in previously overlooked areas within the UK
Ruth Tobias said: “While many in the pensions industry worry about possible conflicts between investing in ‘local’ areas in the UK and the duty to act in members’ best financial interests, LGPS funds may be missing out on great opportunities. Fund managers should be actively exploring with LGPS funds ways to optimise financial returns whilst increasing local investment in previously overlooked areas within the UK.”
“The government’s ambition to level up is a golden opportunity for LGPS funds to take a fresh look at their investments and explore whether similar risk adjusted financial returns can be generated from projects supporting ‘local’ areas. Investment in ‘local’ areas need not equate to lower returns,” she said.
Elaine MacGregor said: “Since many LGPS investors rely on the skills and expertise of external fund managers, the UK government’s levelling-up ambitions creates an opportunity for managers to scale-up their own ambitions, provided they can source and offer institutional grade investment opportunities.”
“Helpfully, the UK government has already clarified that ‘local’ will not be confined to an LGPS investor’s own immediate area, although it is unclear how the government will achieve its ‘levelling up’ agenda if many LGPS investors decide to allocate their ‘local’ investment capital to those regions of the UK which are already successfully growing, such as the south east of England,” she said.
“To meet the government’s ambitions for new local investment, LGPS investors need to have sufficient capacity and expertise to source and carry out due diligence on potential investment opportunities. For smaller LGPS investors, this may only be feasible by relying on the skills and resources of the investment team within their LGPS asset pooling structure,” MacGregor said.
05 Jun 2020