Council pension funds ‘should pool cash for local investments’
By Richard Johnstone in Manchester | 2 October 2012
Local government pension funds should join together into pooled investment groups to invest in local infrastructure schemes, the Smith Institute think-tank has said.
It urged the government to make such investments easier by creating an independent ‘clearing house’ to assess the economic, social and environmental value of schemes.
The think-tank’s report, launched at a Labour party conference fringe event yesterday, found that almost all town hall pension schemes had increased their investment in private equity and infrastructure over recent years to diversify their portfolios.
Local authority pension funds: investing for growth, produced with the Centre for Local Economic Strategies, the Local Authority Pension Fund Forum and investment consultants PIRC, is based on interviews with more than 100 local authority pension fund trustees, fund managers, councillors and officers.
Four-fifths of those interviewed cited infrastructure investments as a growth area. There was also significant interest in the idea of pooling resources or merging funds to provide a new investment source for councils. The report recommended that a core group of funds create a pooled investment vehicle, with at least £25m to invest, that could then invite local authorities to bid for investment.
The main barrier to pooling was perceived to be potential conflicts of interest if funds invested in projects in their own area. There were also concerns about the risks of new investments.
The recommendation for central government to create a ‘clearing house’ was to overcome this. The house would independently assess investments and ensure Local government pension scheme rules would also need to be amended to allow them to invest in ways that are currently restricted, such as limits to investment in limited partnerships. Interviewees also called for guidance from central and local government and CIPFA on the use of pooled investment vehicles.
Green investments were seen as a growing asset class for pension fund investment, as they offer a range of sectors, operations and localities that could diversify risk and returns across an investment portfolio. The main opportunities identified were linked to government policies on waste management, energy generation and carbon reduction targets.
However, respondents also insisted that increasing social return was dependent on exercising the fund’s fiduciary responsibilities. No fund was prepared to accept lower returns in exchange for achieving social benefit.
Neil McInroy, chief executive of the Centre for Local Economic Strategies, said: ‘This report provides clarity for the local government family and highlights the need for better dialogue between Local Enterprise Partnerships, local government and pension funds. We need more market responsive and ready investable opportunities. A new government backed agency, as well as shared local pension fund vehicles for the pooling of impact investment funds, are significant options in this regard.’
Paul Hackett, director of the Smith Institute, said the report showed was ‘growing appetite for alternative social investment’ from local government funds.
‘The challenge is scaling up. A new agency to act as clearing house for these type of investments would help achieve that,’ he added.
Ian Greenwood, chair of the 55-strong Local Authority Pension Fund Forum, said the study set out ‘a route-map for identifying the necessary action required to improve our efforts to create new investment opportunities’.