CIPFA warns LGPS must not become “infrastructure investor of last resort”

27 Nov 15

CIPFA has sounded a note of caution over government plans to establish six “British Wealth Funds” by encouraging Local Government Pension Scheme funds to pool their assets and increase investment in infrastructure classes.

Alongside the 25 November Autumn Statement and Spending Review, the Department for Communities and Local Government issued guidance and a consultation on LGPS fund asset pooling.

The consultation suggests deregulating the existing pension investment framework in favour of a local, prudential approach and empowering the secretary of state for communities and local government to intervene where administering authorities are judged not be taking advantage of the benefits offered by pooling.

Guidance was also issued on how authorities can deliver against the government’s expectation that they pool assets into wealth funds, each with an asset base of at least £25bn. Authorities have been invited to submit proposals, and respond to the consultation, by 19 February.

But CIPFA chief executive Rob Whiteman said continued use of the term “British Wealth Funds” belied a fundamental misunderstanding of the function of LGPS funds.

“In essence, they are a single purpose reserve that enable local authorities to fulfil their statutory responsibility to meet their staff’s pension liabilities. The funds are not the government's money and [the Treasury] is incorrect to consider them as taxpayers’ money simply because the staff and employers who have contributed to them are from the public sector,” he said.

“Consideration of the long-term structure for the management of the LGPS needs to keep the relationship between the assets and the liabilities firmly in mind.”

LGPS investments need to make the best possible return for those people who have contributed to the funds, Whiteman added.

“The funds must not become the investor of last resort, for example, for politically desirable infrastructure schemes that the markets do not see as investment grade proposals."

John Wright, head of public sector at actuaries Hymans Robertson, which carried out a review of LGPS asset management, said it would be wrong to mandate how much LGPS funds invest in infrastructure.

“It is important that funds are able to invest in a range of different investments including stocks and shares, property and government bonds in the UK and elsewhere to deliver the best outcomes for pension scheme members and employers who pay contributions,” he said.

But Wright predicted that infrastructure investment was likely to increase once asset pooling was enabled as funds would be able to invest more easily and cost effectively.

He added that the LGPS community was “vigorously engaged” in how it could make pooling work, and noted that, as it would take time to get things right, the government’s timetable was a sensible one.

  • Vivienne Russell

    Vivienne Russell is managing editor of Public Finance magazine and publicfinance.co.uk

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