Capital ideas for the LGPS

8 Mar 12
Alex Thomson

The Local Government Pension Scheme should be investing in infrastructure programmes across the county. It would be good for fund members and for the economy

The government has set itself a significant challenge: how to deliver £250bn worth of infrastructure investment whilst cutting the budget deficit.

One way to achieve both these objectives would be to enrust local government with greater powers. Such an approach would also deliver on a third key strand of the coalition’s agenda: devolving power to the lowest appropriate level.

This is the subject of a report, Credit Where Credit’s Due,  published this week by Localis in partnership with Lloyds Banking Group. We explore how local authorities should be thinking and acting big, including making better use of the 101 funds that comprise the Local Government Pension Scheme (LGPS), and the £143bn worth of total assets it currently holds.

There are signs that the LGPS is becoming increasingly interested in infrastructure investment – Berkshire, Essex and Tyne and Wear are but three local government funds to have recently raised their investments in this area. This trend is to be welcomed – and local authorities and central government alike should encourage such funds to go further.

Between 2007 and 2009, the LGPS lost over £14bn – wiping up to 28% off the value of individual funds. This has seen investment income as a percentage of LGPS total income decline from 30% in 2005/6 to 23% in the last financial year.

Yet it is not only the past that suggests potential dangers to the schemes viability – future demographics are also not promising. The percentage of benefits paid out as a proportion of receipts brought has risen from 76% to 85% in the past five financial years – partly due to the economic downturn and people leaving the scheme, but also a sign of the increasingly aged population and thus increased number of claimants.

To mitigate against these trends, the LGPS will have to increase investments, but will also need safe ways of doing so. This could be effectively achieved through infrastructure. A new National Infrastructure Bank, capitalised by the LGPS together with private pension funds and quantitative easing, would provide a vehicle to invest in infrastructure across the country.

This not only avoids the potential legal problems of an individual local government pension scheme investing in projects based in its own area, but allows a greater choice of investment opportunities (and thus better returns for each fund in the long run).

The challenge before us is how to deliver growth in a time when capital – both private and public – is limited. The government has attempted to stimulate the economy by both credit and quantitative easing, and such mechanisms certainly have a role to play.

Yet UK pension funds represent around £2trn worth of capital, of which it is estimated that less than 1% is invested in domestic infrastructure. It is right that they should be encouraged to go further, and the LGPS – both for its own benefit and to provide a catalyst for counterparts in the private sector – can take a lead here.

Such investment can help drive a new wave of better roads, broadband and waste facilities, drive national growth and create jobs.  It is time to unlock such investment.

Alex Thomson is chief executive of Localis, the local government think tank


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