Rachel Reeves is considering a “Canadian” model for local government pensions investment. GLIL’s Ted Frith supports the idea of galvanising UK infrastructure investment but argues that the mechanism to achieve this already exists.
Chancellor Rachel Reeves’ proposal to review the operating model of the Local Government Pension Scheme (LGPS) to boost the UK economy is making waves across the pensions sector.
The plan – to focus on fragmentation and further consolidate LGPS pools to achieve greater scale, collaboration and efficiency – seeks to drive forward UK companies by fuelling investment in key national infrastructure, housing and transport projects.
These are laudable objectives and are similar to those announced by George Osborne in 2015. They underpin our philosophy of a collaborative approach to investing and drove the formation of GLIL in 2016.
They also may explain why a number of the largest LGPS funds already invest heavily in domestic infrastructure projects through the fund.
Why infrastructure makes sense
We must, I believe, stop making purely ideological arguments about why investors should back UK projects and instead focus on other sound reasons as to why it makes sense.
UK pension fund liabilities are often linked to inflation through the UK consumer prices index (CPI). Investing in an asset class that generates stable index-linked cashflows over the long term can temper the CPI liability and allow a pension fund to create regular capital income from investments if invested in the appropriate way.
This is a vital element for maturing pension schemes that have significantly reduced fixed income exposure over the past 15 years. GLIL has a mandate to overweight investments in UK infrastructure, rather than overseas, to mitigate the risk of UK inflation.
Beyond inflation protection, the LGPS is increasingly supportive of investments in local projects that offer tangible benefits to their communities, such as job creation, improved public services, housing, transport and sustainable development.
This is driven by a desire to generate positive social and economic impacts as well as an appropriate investment return.
These benefits are widely understood in the pensions world and many pension schemes have already significantly increased their allocation to infrastructure investments, in the UK and elsewhere.
This means there is little standing in the way of further capital allocations to infrastructure from the LGPS and elsewhere from an investment perspective.
Carrot or stick?
Rather than focus on mandating investment into UK opportunities for a subset of the investor universe, I urge the chancellor to focus instead on making the UK the most attractive destination for capital deployment for all investors.
The government needs to attract capital and then facilitate its deployment. One significant challenge to deployment in the UK is the planning system. Another is the electricity grid with its current multiple constraints.
There are also widely known issues surrounding the economic regulation of utilities in the UK and we have no replacement in sight for assets that depended on models such as public-private partnerships and private finance initiatives, which were abandoned a decade ago.
I welcome the government’s willingness to engage with stakeholders since the election, and we look forward to it achieving its stated aim of dealing with the deployment blockages.
Providing greater clarity and removing uncertainty increases both the likelihood of attracting long-term funding and the amount of capital available to invest.
No change necessary in the LGPS
There may be legitimate reasons for reviewing the LGPS pooling model but, I argue, it is not necessary in order to increase the flow of capital into UK infrastructure.
Many in the LPGS community understand the importance, and value, of UK infrastructure investment to pension funds. They also see the opportunities outside of the UK and have a fiduciary obligation to seek out the best risk adjusted returns.
Supportive and thoughtful policies with a focus on reducing execution, operational and regulatory risks can tilt the balance in favour of UK infrastructure and unlock significant amounts of new capital that can support the UK growth agenda.
Ted Frith is managing director at GLIL Infrastructure.
