A handful of Local Government Pension Scheme funds and a former pensions minister are unconvinced by the government’s new requirement for these schemes to set out plans for investing up to 5 per cent of their assets in their domestic projects, as trustees’ fiduciary responsibilities could come under threat.
‘Levelling up’ the UK is a core policy initiative for the conservative government, a policy that is broadly understood to involve channelling investment into areas of the country that have previously been overlooked.
At the start of February, the Department for Levelling Up, Housing and Communities published its white paper on levelling up. Amid a sweeping range of policies aimed across government departments, it asked LGPS funds to set out plans for investing up to 5 per cent of their assets in projects that support domestic initiatives.
The paper observed that there are “large pools of underutilised capital across the UK that could, in principle, be used to support investment”.
By imposing a top-down target for this, the government risks creating a conflict
Lambeth Council
“Only a few funds have so far invested with a local, place-based lens,” it noted. The government also said that current institutional investment has been “constrained by regulation”.
The government has confirmed to the Local Government Association that its encouragement of 'local' investment relates to the UK, and not specifically investment in a LGPS fund's local area.
The policy does not appear to have involved the Department for Work and Pensions, which does not administer LGPS funds. The DWP told Pensions Expert that it would not mandate a pension scheme to take any specific actions in this space.
Fiduciary responsibilities come under threat
A key topic for debate in discussions surrounding environmental, social and governance-friendly investment involves the tension between investing for the greater good and a scheme’s fiduciary responsibilities, ensuring that its members’ benefits are paid appropriately.
The £1.9bn London Borough of Lambeth Pension Fund announced its net zero target in January, in which it aims to hit net zero by 2040.
The council told Pensions Expert that its ESG commitments would underpin its future investment decisions, while it maintained its fiduciary obligations.
“Given this duty, we question the announcement by the government of LGPS investment in local projects, given the lack of detailed discussion on how this may be achieved at the scale suggested without compromising the LGPS’s fiduciary responsibility to its members,” the council said.
“We have had many discussions about opportunities for local investment, but by imposing a top-down target for this, the government risks creating a conflict between arbitrary local investment targets and our overriding fiduciary responsibility.”
The £23bn Greater Manchester Pension Fund, meanwhile, already invests 5 per cent of its assets in local projects. According to a white paper published in May 2021, the GMPF was the only fund to be at this threshold, according to analysis of 50 LGPS annual reports for 2018-19.
The government’s levelling up paper cited the influence of the GLIL Infrastructure platform, which the GMPF established together with the Northern and Local Pensions Partnership Investments and LGPS asset pools.
The GLIL has invested around £2.5bn, which includes £800mn of GMPF’s commitments. Investments include Anglian Water, Forth Ports and Clyde Wind Farm.
Yet the GMPF too reminded the government of the hierarchy of its responsibilities, with investment performance being its main priority.
“It must be pointed out [that] the primary aim of the pension fund is to generate a financial return,” a fund spokesperson said.
“Therefore, there will be numerous priority levelling up schemes that would be too risky for the fund to consider even though they are necessary to the economy, which will require the injection of government funding to level up those areas.”
Will the target be enforced?
While it will be mandatory for LGPS funds to have a plan for these investments, at this stage, the 5 per cent target represents an ‘ambition’, rather than a statutory requirement.
Former pensions minister Sir Steve Webb understood the appeal for central government to encourage pension fund investment into local projects.
The LCP partner, however, suggested that there may be no way of enforcing the 5 per cent target.
“Initiatives like this always prompt the question as to why schemes are not investing in these projects already if they are a good investment,” he said.
“If LGPS schemes are being asked to accept projects with possibly lower returns because they serve the wider objectives of the government, this could leave councils having to put more money in to make up for the resultant shortfall in the scheme.”
Prudential reports itself to regulator over AVC failings
Prudential reported itself last year to the Pensions Regulator, as a perfect storm of IT problems and coronavirus-led disruption pushed customers looking to cash out their additional voluntary contributions into long delays.
Some LGPS funds, including the £1.4bn London Borough of Barnet Pension Fund, were less sceptical about the government’s proposal.
A Barnet Council spokesperson said: “We look forward to working with the government to create even more opportunities to invest while continuing to support and develop our local communities.”
The DLUHC has been approached for comment.
