LGPS funds to be pooled for infrastructure investment boost

5 Oct 15

The assets of the 89 local government pension funds in England and Wales are to be pooled into six new British Wealth Funds as parts of efforts to overhaul infrastructure financing, Chancellor George Osborne has announced.

Ahead of his speech to Conservative Party conference in Manchester today, Osborne also announced the creation of an independent National Infrastructure Commission to advise government on the UK’s infrastructure needs. It will be chaired by Labour peer and former transport secretary Lord Adonis.

The LGPS asset merger is part of a four-point plan to boost infrastructure development. Each of the half dozen wealth funds will be worth more than £25bn.

In additional to National Infrastructure Commission, the plan commits to a £5bn increase in infrastructure spending by 2020, funded through asset sales. Changes to the planning regime will also be made to facilitate the development of brownfield sites.

Osborne said the creation of British Wealth Funds would revolutionise infrastructure investment.

The current LGPS funds lack the expertise to invest in infrastructure, he stated, with only around 0.5% of £180bn assets invested in such projects. In countries with larger pooled public pension funds up to 8% of assets are infrastructure and 17% are housing and infrastructure.

Greater infrastructure investment is vital for the future economic success of the country, the chancellor will tell Conservative delegates later today.

“I’m not prepared to turn round to my children – or indeed anyone else’s child – and say: I’m sorry, we didn’t build for you. We have to shake Britain out of its inertia on the projects that matter most.”

The National Infrastructure Commission, to be set up in law, will start work immediately to provide evidence on the UK’s infrastructure and could “hold government’s feet to the fire if it failed to deliver”.

Osborne said he was “delighted” Adonis had agreed to chair the commission.

“He’ll now sit as a cross bench peer and help us create Britain’s plan for the future,” he said.

Responding to the announcement on the LGPS, CIPFA chief executive Rob Whiteman said that while it is disappointing there had not been consultation with the sector, he agreed with Osborne there were inefficiencies in the LGPS that needed to be addressed.

“However we need to remember that unlike all other large public sector pension schemes such as teachers, armed forces, health and civil service (whose future liabilities will be subsidised from current taxation), local government is alone in holding any pension fund assets to pay its pensioners from. At the last count these assets amounted to some £200bn of investments paying out in cash terms some £7bn annually towards the costs of current and future pensions.

“So we need to be extremely cautious that the local government pension fund investment returns are not compromised by thoughts of compulsory investment in local or regional infrastructure from which the returns may be much less certain. All investments with pensioners' contributions must be on investment-grade proposals and never on vanity projects that cannot attract investment from the market.”

London Pensions Fund Authority chair Sir Merrick Cockell said it welcomed the chancellor’s focus on infrastructure.

“For some time we have been calling on government to take in to account the resources of the LGPS and invite UK funds to invest in these UK projects.

“While we await the detail behind this announcement, we are already well underway in forming partnerships with other funds, including our £10bn asset and liability management partnership with Lancashire County and a £500m infrastructure investment joint venture with Greater Manchester.”

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