LGPS to target up to 5% asset investment in local projects

The government has announced plans to work with the Local Government Pension Scheme (LGPS) to publish plans for increasing local investment, including setting an ambition for up to 5 per cent of assets to be invested in projects supporting local areas.

The government's white paper, Levelling Up the UK, explained that there are large pools of underutilised capital across the UK that could, in principle, be used to support investment.

LGPS funds were highlighted as one example of this, representing assets with a combined market value of £326bn as of March 2020.

“Only a few funds have so far invested with a local, place-based lens," the report stated, suggesting that there was "huge scope" to mobilise more financing from UK institutional investors in local projects, with regulatory steps now being taken to do so.

In addition to this, the paper noted that whilst “only a tiny fraction” of LGPS funds are currently allocated to local projects, if all LGPS funds were to allocate 5 per cent to local investing, this could unlock £16bn in new investment.

In light of this, and in an effort to “ensure that all LGPS funds play their full part”, the government has called on LGPS funds, working with the LGPS asset pools, to publish plans for increasing local investment, including setting an ambition of up to 5 per cent of assets invested in projects which support local areas.

It also emphasised that there is already government work underway to address issues in this area, stating that "the UK government has committed itself to removing obstacles and costs to making long-term, illiquid investments in the UK”.

The new UK Infrastructure Bank, for instance, has a mandate to catalyse investment to support regional and local economic growth, which the paper suggested will help increase the capacity and capability of local authorities to deliver infrastructure in their areas.

“It will also co-invest, offer guarantees through the existing UK Guarantees Scheme, and provide a range of debt, equity and hybrid products,” the report explained. "It is committed to expanding institutional investment in UK infrastructure, including exploring opportunities with the LGPS.”

In addition to this, the paper flagged recent work from the Department for Work on Pensions on amending the charge cap to help encourage greater illiquid investment, confirming that a government response to the recent consultation on this is due “in the coming months”.

Hymans Robertson head of DC investment, Cllum Stewart, commented: "In today’s ‘Levelling Up the UK’ White paper, the government has once again reiterated its commitment to relax DC charge cap rules to help encourage greater levels of investment in illiquid assets. Through the creation of new long-term asset funds, schemes will be able to access investments that could improve returns net of costs and charges over the longer term. The paper is evident of the willingness to explore illiquid investments.

“This will provide a vital opportunity to improve financial outcomes and will work to remove any remaining barriers preventing DC schemes getting the best for their members and should be seen as an exciting opportunity. This is another chance for pension schemes to improve engagement with their members.

"We know that individual DC savers have been telling the industry that they want their money to have a positive impact on the world around us, and that illiquid investments are a way in which to do this. Although costs and charges are likely to be higher than most existing DC funds, we continue to believe that in this instance it’s possible to pay more and get more for DC savers.”

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