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LGPS might get more freedom to invest in infrastructure

06 November 2012

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The UK government is launching a consultation looking at the possibility of giving local authority pension schemes more freedom to invest in infrastructure. The move would pave the way for a possible £22bn cash injection into UK infrastructure projects.

Currently, local authority pension funds have a 15% cap placed on the amount they can invest through limited partnerships. Limited partnerships are the asset vehicle often used for major property, private equity and infrastructure projects.

A number of LGPS funds already invest around 15% of their portfolios in limited partnerships through property and private equity investments. This means that they have little capacity to invest in new infrastructure initiatives. The new proposals increase the current limit to 30 %.

With the announcement of the new £2bn Pensions Infrastructure Platform (PIP) which is set to be launched during the first half of 2013 the debate of greater freedom for local government pension schemes has heated up again.

Local government pension schemes in the UK have been lobbying for more leeway to invest in infrastructure. They argue that current rules are hampering their investment in the sector.

PIP is being created to facilitate pension fund investment in infrastructure; it will be created for pension funds by pension funds. As was recently announced, its founding investors include West Midlands Pension Fund and Strathclyde Pension Fund.

The fund will invest in core infrastructure assets and will feature low leverage, low fees and inflation-linked cash returns of RPI+2 – 5%. The aim is to launch in the first half of 2013.

The CBI commented on the proposals with Rhian Kelly, CBI's director for Business Environment, saying: "Unlocking pension fund investment is critical to improving the UK's infrastructure, so businesses will be heartened that Government is listening to the recommendations of the CBI and others, and taking action to lift barriers and attract new sources of funding.

"Local Government pension funds are some of the largest in the country and many already have experience of investing in infrastructure and housing. Infrastructure projects should be a natural fit for these funds, which have very long time-horizons and are looking for a healthy investment return. Lifting restrictions should allow them to take a more prominent role in deepening pension funds' involvement in infrastructure financing.

"But we cannot afford to rest on our laurels. More must be done to ensure we deliver a pipeline of investable projects and ensure that the real priorities – the projects of national economic significance – are given all possible support."

The National Association of Pension Funds (NAPF) also welcomed the Government's consultation. NAPF chief executive Joanne Segars said:

"We are pleased that the Government wants to increase or remove the limits that local authority pension funds can invest in infrastructure. This has the potential to remove a key barrier that is preventing some local authority pension funds from investing in this important asset class.

"The current LGPS investment regulations are out of line with current government policy. On the one hand, the Government says that pension funds should invest more in these projects, but on the other there are rules preventing this.

"Our local authority members have told us on many occasions that they cannot make important investments because of out-dated rules which place limits on the amount that can be invested in infrastructure. These regulations are no longer fit for purpose and need urgent reform."

She added that 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.

First published 06.11.2012