Exploring pension fund opportunities

The Government is looking to institutional investors such as pension funds to invest more in the country’s infrastructure. We believe that infrastructure investment can be an appropriate investment for pension funds, because it can provide pension funds with the long-dated, stable and index-linked returns they need.

There is strong interest among local authority pension funds 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, which aims to make it easier for UK pension funds to invest in infrastructure.

But while private sector pension funds are freer to explore this kind of investment, local authority pensions find it much more difficult to do so. This is because of over-prescriptive and out-dated investment regulations which place limits on the amount that can be invested in infrastructure. These rules do not help such 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.

Capacity to invest
At present, local authority pension funds have a 15 per cent 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 per cent 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 per cent limit on Limited Partnerships, and this is preventing them from investing in infrastructure.

The good news is that the Government has decided to tackle this issue 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 per cent of a local authority pension fund to 30 per cent. But we also urged the Government to reform the regulations more widely to bring them in line with the regulations covering private sector pension fund investments. Our local authority members have been pressing for this change for years.

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 types of legal structures, for example Limited Partnerships or collective investment schemes. This can potentially lead to sub-optimal investment allocations for local authority pension funds. This is compounded 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.

Investment reform
That is why the NAPF and other organisations have long campaigned for the LGPS investment regulations to be reformed to reflect the principles-based approach used in the private sector.

It is crucial that the Government proceeds swiftly to increase the limit on investments in partnerships from 15 per cent of a local authority pension fund to 30 per cent. Our local authority members believe this is the only way to give funds the immediate flexibility they require to diversify their assets in these difficult economic times. By increasing the cap, more local authority funds could invest in infrastructure.

Wider reform
But this measure alone is not enough to solve the wider problem of the overly prescriptive nature of the LGPS investment regulations. The Government urgently needs to embark on a wider reform of these regulations so that local authority pension funds have the flexibility needed to tailor their investments in response to an ever changing investment landscape and, ultimately, deliver good outcomes for their members and value to the taxpayers. 

To download the NAPF’s full response click here

Further information
The National Association of Pension Fund represents all types of scheme, including defined benefit, defined contribution, group personal pensions and statutory schemes such as those in Local Government. For further information visit www.napf.co.uk