London's local authorities are in talks about combining their pension funds in order to cut administration costs and invest up to £2.5bn a year in infrastructure projects in the capital.

In the plans, pension schemes from London's 33 boroughs, Transport for London and the London Pension Fund Authority (LPFA) would merge and create a pension pot worth over £30bn. According to the group's calculations this pot would then allow for up to £2.5bn a year to be invested in infrastructure projects such as transport, recycling and (social) housing.

The group also calculated that the benefits received from consolidating administration costs could accumulate to around £30m. Under the proposals, this investment pot would be overseen by a board consisting of an independent chairman and representatives of the participating employers.

The drive to invest in infrastructure ties in with calls made by the Treasury last year to encourage UK pension funds to invest in homegrown infrastructure and kick-start the economy. The result of these talks was the decision to create a special investment fund with the help of the National Association of Pension Funds and Pension Protection Fund.

Though bringing clear financial benefits, the downside to the plan would be that boroughs might lose control over how the funds are invested.

On top of that, according to a report commissioned by the group, councilors would have be careful to avoid "conflicts of interest". Benefitting politically from projects which are the results of the scheme's investments could have a backlash.

Also, currently each council can set its own investment strategy. This responsibility at the Borough level goes with the obligation that if returns are not as planned and gaps in the funding arrive, council taxes might be used to fill that gap.

Using council tax money to heal deficits of a combined London pension fund could be controversial as the Borough's funds are in varying health and residents of some Boroughs pay much more council tax than others.

The report, the result of an earlier meeting last month, stated that "these fundamental challenges will need to be resolved before any proposed fund amalgamation should be further considered."

The Confederation of British Industry (CBI) said it welcomed the talks among London's councils. Katja Hall, CBI chief policy director, said: "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.

"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."

Further work will be reported back to leaders this summer.

First published 10.05.2012

azeevalkink@wilmington.co.uk