Sir Merrick Cockell
For a long time the LPFA has been promoting the benefits of public sector pension fund investment in infrastructure, and over the past year we have been extremely encouraged to see material progress made on this at a national level.
As we know, infrastructure has the potential to be a very attractive investment for pension funds. It provides long-term income with predictable and strong cash flows, matching pensions liabilities, as well as bringing inflation protection, since assets often include an inflation linkage. The scarcity of good quality assets and active management also leads to capital appreciation, and there is the opportunity to benefit from supernormal returns, since there is often an element of development risk.
However, at present, infrastructure makes up a very small amount of LGPS assets under management, primarily because of the LGPS’s existing structure, containing dozens of smaller funds for whom it is very difficult to invest in this asset class.
As a result, the LGPS is currently undergoing a period of radical reform, which will see the 89 funds join forces and pool their assets of around £200bn to create a number of larger wealth funds. Through collaboration, these pooled funds will have the capacity to scale up their direct investment in large-scale infrastructure projects in the same way that, for example, overseas-based sovereign wealth funds and pension funds have been able to invest.
The LPFA has for a number of years been calling for collective investment between LGPS funds as a positive step forward, both in enabling LGPS funds to address their deficits and to facilitate much-need investment in UK infrastructure. This will be the basis of our initial submission to the DLCG consultation, which closes on 19 February. Refined and completed submissions will be required from funds by 15 July.
We are keen to show from our own experience that there is already a strong appetite for pooling to create scale for direct investment in infrastructure. Our own experience can help demonstrate how LGPS funds can successfully collaborate for pooling purposes and fund larger-scale infrastructure development.
We have already been an active participant in pooling arrangements, specifically to enable us to increase our direct investment in infrastructure and, more generally, to expand our fund, so we have the capacity to invest directly in a number of asset classes. At present, we invest just over 5% of our fund in infrastructure, and have an ambition to grow this to 10%.
Our current projects include funding the building of new high-quality and affordable homes in East London; the creation of a £10bn pension pool with Lancashire County Pension Fund – the first partnership of its kind within LGPS; and the creation with Greater Manchester Pension Fund of a £500m joint infrastructure investment fund, which made its first investment in October 2015.
We are actively pursuing new partners for the latter venture, in order to meet a National Infrastructure Commission aim to secure further investment in house and road building, commercial and mixed use developments, and large scale regeneration projects. This could provide a vehicle for other LGPS funds to invest in infrastructure and thus grow the pot substantially.
However, while the arguments regarding scale and collaboration are widely acknowledged, an area that has attracted less attention is the mechanism for matching infrastructure opportunities with prospective LGPS investors – many of whom will have limited experience of direct infrastructure investment.
Pooling will allow funds to harness resources, use economies of scale and share talent in order to make a difference in investing in infrastructure, however, it will not help us to source and access infrastructure deals.
Alongside the Local Government Association, we are advocating the creation of an LGPS body to match infrastructure opportunities with prospective investors. We believe local government is the ideal partner for these private infrastructure deals; innovative councils can identify projects suitable for direct investment and are in a key position to collaborate with investors to develop these ideas.
The LGPS body would play a pivotal role in pairing investors to investees and assist in attracting private investment quickly and efficiently. It would be responsible for gathering information about potential infrastructure and housing investments, and subsequently matching councils and private investors together, presenting the right opportunities to interested parties.
Recently the National Audit Office identified 37 of 106 infrastructure projects where a variety of issues, including a lack of funding, is jeopardising completion. The watchdog highlighted that government response to this situation had been poor.
A dedicated body acting on the behalf of investors and local government would go a long way in eliminating this issue. Furthermore, the body would connect each LGPS fund more directly to its region – local partners with local knowledge on locally important infrastructure projects.
Sir Merrick Cockell is chairman of the London Pensions Fund Authority.
