Why Government needs to be flexible on infrastructure investment

Written By: Helen Forrest Head of Policy and Advocacy NAPF

Infrastructure has been a hot topic within the Government for some time as it is seeking institutional investors such as pension funds to invest in major UK projects. Pension funds are interested in this type of investment because it can provide them with the long-dated, stable and index-linked returns they need.

Local authority pension funds have shown a lot of interest in this asset class. Strathclyde Pension Fund and West Midlands Pension Fund have recently signed up to an initiative under development called the Pensions Infrastructure Platform. This is being developed by the National Association of Pension Funds (NAPF) and the Pension Protection Fund (PPF), and aims to facilitate infrastructure investment by UK pension funds.

Whereas private sector pension funds can more easily explore this kind of investment, it is a different story for local authority pensions. These pension funds find it much more difficult to invest in infrastructure because of overprescriptive and out-dated investment regulations which place limits on the amount that can be invested in infrastructure. These regulations do not help local authority pension funds effectively manage their investment risks and meet their long-term funding objective: to act in the best interests of their members and council tax payers.

The problem is that local authority pension funds currently have a 15% cap placed on the amount they can invest through limited partnerships, the asset vehicle often used for major property, private equity and infrastructure projects. As a number of Local Government Pension Scheme (LGPS) funds already invest around 15% of their portfolios in limited partnerships through property and private equity investments, they have little capacity to invest in new infrastructure initiatives. A number of our local authority members have told us that they are very close to this 15% limiton Limited Partnerships. This is preventing them from investing ininfrastructure.

Encouragingly, the Government has decided to take action by launching a consultation last year on revising the LGPS investment regulations. In our response to the consultation we recommended the option where the Government increases the limit on investments in partnerships from 15% of a local authority pension fund to 30%.

On top of this, we called on the Government to change the regulations more widely to bring them in line with the regulations covering private sector pension fund investments. Our local authority members have been asking for this change for a long time.

In contrast to private sector occupational pension schemes, the LGPS investment regulations prescribe arbitrary limits on the amount local authority funds can invest in certain legal structures such as Limited Partnerships or collective investment schemes. This can potentially lead to sub-optimal investment allocations for local authority pension funds. This is worsened by the fact that the regulations have also failed to keep up with changes in the investment world, making it difficult for funds to make appropriate investment choices. It is for this reason the NAPF and others have long campaigned for the LGPS investment regulations to be changed to reflect the principles-based approach used in the private sector.

The Government needs to proceed swiftly to increase the limit on investments in partnerships from 15% of a local authority pension fund to 30%. According to our local authority members, this is the only way to give funds the immediate flexibility they require to diversify their assets during these difficult economic times. By increasing the cap, more of them could invest in infrastructure.

But the Government needs to do more. It needs to carry out a wider reform of these regulations if it is to solve the full problem of the overly prescriptive nature of the LGPS investment regulations. This would give local authority funds the flexibility needed to tailor their investments in response to an ever changing investment landscape and, ultimately, deliver positive outcomes for their members and value to the taxpayers.