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Pension schemes want infrastructure investment cap removed

26 July 2012

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Local government pension schemes around the country are willing to invest in infrastructure as suggested by the government but say the current cap on such investments will have to be removed or changed before they are able to do so.

Current plans by the government, which were announced in November 2011, to increase infrastructure investments by pension schemes in order to boost economic growth might not reach the levels expected due to a limited investment freedom experienced by local government pension schemes.  

While pushing private sector pension funds to invest more in the asset class, regulations limit what the UK's 99 local government pension funds can do with their funds, currently totalling around £143bn.

Speaking to Reuters, Mike Taylor, chief executive of the London Pension Fund Authority (LPFA), one of the largest local government schemes in the UK with assets of over £4.2bn, said: "On the one hand, the government is trying to encourage investments in infrastructure from pension funds, while on the other hand, the rules that another government department have (for such an investment) are counterproductive.

"We are going to launch a concerted action over the next few weeks urging government ministers to change this limit or give us some more leeway," Taylor said.

Currently, local government pension funds are only allowed to invest up to 15% of their assets in partnership structures. These include limited partnerships, a structure common when investing in real estate, private equity and infrastructure funds.

As most of the funds already allocate assets to real estate and to private equity it is now difficult for them to invest a large chunk of their assets in infrastructure without going over the allowed limit.

Joanne Segars, chief executive of the National Association of Pension Funds (NAPF) agreed with the call for change which Taylor announced. She told Reuters: "We have recently written to the government asking them to lift these rules. With the focus on infrastructure, now would be the pertinent time for the government to act."

Private sector pension funds on the other hand are not subjected to any restrictions on their investments.

Segars said: "We think the rationale behind the rules is out of date and out of place. Local authority pension funds should have the same sort of 'prudent person' principle that private sector pension schemes have."

Just after the announcements last January, the LPFA released the following statement on its website: "LPFA's view is that infrastructure funds are a good match for pension fund liabilities and a proper asset class for a pension fund to invest in. Indeed we already have an allocation of £150m in such funds. LPFA has signed a Memorandum of Understanding with the Treasury which confirms participation in any discussions but does not commit LPFA to any future investment.

"For LPFA the investment case is of utmost importance. If the returns to the fund are attractive and the investment case can be made with appropriate governance structures in place, then LPFA will investigate the possibilities further. Suitable guarantees would also be requested from the government on the level of future returns."

 

First published 26.07.2012

azeevalkink@wilmington.co.uk