Consolidating local government pension funds could unlock £200bn in private investment in housing and infrastructure, research from the Pension Insurance Corporation (PIC) has shown.
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Chancellor Rachel Reeves announced last week that she plans to introduce a pensions bill that would see 86 local government pension schemes (LGPSs) pooled into eight megafunds.
The PIC said that if LGPSs – currently valued at around £400bn – directly invested £55bn in equity in projects that need large injections of capital, this could crowd in an additional £165bn in private capital.
As yet, the LGPSs do not have the scale required to make this level of investment.
The new approach would echo models in Australia and Canada, which typically invest in infrastructure schemes and tend to generate higher returns.
Tracy Blackwell, chief executive of PIC, said: “LGPS assets could and should be invested more in UK infrastructure projects. That isn’t happening because the LGPS is hugely fragmented.”
If the schemes were pooled together, they could “take on equity sponsorship of UK infrastructure projects crowding in billions of pounds of private investment into British infrastructure and housing, boosting growth and creating significant social value”, Ms Blackwell said.
Tim Gilbert, partner at LCP, said that consolidation should be welcomed “if it leads to lower costs for the housing associations”, and that it “could potentially lead to more local investment”, including greater investment in housing development.
“That really could be a win-win for associations,” he said.
Mr Gilbert added: “Many LGPS funds have historically delivered strong investment returns and invested in both the national and local economies. Any consolidation should look to build on, rather than replace, this.
“We cautiously welcome the plans but note that it will take time for consolidation to be implemented and for any benefits to emerge, and the chancellor’s goals may not be achieved without careful planning.”
He added that employers are currently paying in much more than they would be if contribution rates were set today, putting in more than £9bn last year.
If these rates were reduced, it could ease councils’ budgets in the short term.
Dale Walmsley, partner and head of public service pensions at First Actuarial, highlighted the “significant surplus” being built up in the LGPSs through asset performance and contributions.
“The social housing sector could benefit from surplus, which it helped build up, to offset against the cost of new benefits and invest savings directly in housing and services,” Mr Walmsley said.
“This is not a case of choosing one or the other. With careful consultation and planning, LGPS investments can be used to boost both economic growth in the long term and help participating associations – and the communities they serve – in the short term.”
LGPSs already invest in social housing. Asset management giant Gresham House raised £125m from the Gloucestershire and Devon pension schemes earlier this year.
The Greater Manchester Pension Fund, the UK’s largest local government pension scheme, invested £120m in Legal & General’s Affordable Housing Fund, while Access Pool, a group of 11 local authority pension schemes, invested £125m in the same fund.
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