Pension Funds: Paving the way for investment

Plans to double the amount of cash that local government pension funds are allowed to invest in transport infrastructure are out for consultation until December 6 2012

Under proposals announced at the beginning of November, local authority pension schemes could have greater freedom to invest in infrastructure, paving the way for a possible 22 billion pound cash injection into roads and rail.
   
Those responsible for pension schemes had been lobbying the government for more leeway to invest in infrastructure, arguing that current rules were hampering their investment in the sector. As part of wider consultation, which runs until December 6, local government pension funds could double the amount they can legally invest into key infrastructure projects. Currently, the funds are allowed to invest up to 15 per cent of their assets in partnership structures, such as limited partnerships, which are common among real estate, private equity and infrastructure funds. The new proposals increase the current limit to 30 per cent.
   
The Local Government Pension Scheme England and Wales is administered by 89 separate local funds that hold combined investment assets worth 150 billion pounds. Local Government Minister Eric Pickles said: “Unlocking Town Hall pension pots so they can be used to invest in vital infrastructure projects is a common sense decision that will help this country complete on a global scale and get Britain building.
   
“By lifting the restrictions controlling local pension investments councils could pump a further £22billion directly into job creating infrastructure projects that will boost our economy.”

Surge of investment
Low interest rates and volatile equity markets have seen a surge of new pension fund money into transport and other major facility projects. Last November, Chancellor George Osborne announced plans to raise 20 billion pounds from pension funds to help pay for projects ranging from the construction of high-speed rail lines to power stations.

A new £2bn Pensions Infrastructure Platform is being created to facilitate pension fund investment in infrastructure. The fund will invest in core infrastructure assets and will feature low leverage, low fees and inflation‑linked cash returns of RPI+2 – 5 per cent.

The aim is to launch in the first half of 2013. Six large pension schemes have signed up to the new Pensions Infrastructure Platform (PIP), a vehicle by which funds can back projects. The funds are: BAE Systems Pension Funds; BT Pension Scheme; Pension Protection Fund; the Railways Pension Scheme; Strathclyde Pension Fund; and West Midlands Pension Fund. They are expected to provide around half of the fund’s target £2bn investment capital.
   
The launch of the consultation was welcomed by Joanne Segars, chief executive of the NAPF, who said the proposals had the potential to remove a “key barrier” currently preventing some local authority pension funds from investing in infrastructure.
    
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. Lifting this limit would 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.”

A number of LGPS funds already invest around 15 per cent 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.

Rhian Kelly, director for business environment at the Confederation of British Industry (CBI), said: “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.”

Further information
The consultation document Local Government Pension Scheme: Investment in Partnerships can be found at tinyurl.com/bvv6bpq