LGPS roundtable: ‘Government needs to change its approach to getting things done’

Local Government Pension Scheme leaders outline key steps that would help unlock more investment in the UK at an LGC investment roundtable in partnership with IFM Investors. Nic Paton reports.

Back in 2022, the UK government’s levelling up white paper set out an aspiration for Local Gov ernment Pension Scheme funds to invest 5% of their assets into UK infrastructure, especially projects to support local areas. This, it argued, could unlock as much as £16bn in new investment for communities.

Where are we with this ambition? Given the scrapping of the northern leg of HS2 and the upcoming general election which could see a change of government, what is the landscape and appetite for such investment?

To unpick these questions, LGC, in association with IFM Investors, brought together a panel at the LGC Investment Seminar in Carden Park, Cheshire, for a roundtable discussion. The aim was to consider key opportunities for deploying this investment between now and 2030, impediments or barriers to doing so, and reflections on what the future might hold.

Government pressure

Martin George, LGC deputy editor and chair of the event, opened the discussion by highlighting how the LGPS is coming under increasing pressure from the government to invest more in the UK. “How do central government, local government and asset managers work together to actually realise these opportunities and make this a success? That’s the exam question we’re talking about today,” he said.

IFM Investors is working closely with the government on this issue, said Deepa Bharadwaj, its head of infrastructure Europe, but she recognised these investment decisions have to be made on the basis of deliverable returns. “It’s very much to ensure we generate returns for members; this is important, this is something we are all driven by,” she said.

Chris Carubia (Lib Dem), pensions committee spokesperson at Merseyside Pension Fund, highlighted both his fund’s fiduciary duty to its 130,000 members and the sense that levelling up hasn’t really reached places like Merseyside, with the collapse of HS2 only amplifying this.

“It does give you pause to wonder whether it’s worth investing in UK infrastructure, as opposed to other places where you’re more guaranteed to get a return. However, we are looking to invest more in the UK, and certainly more in areas of the north-west, if possible,” he said.

“I’d like to be investing more,” agreed the fund’s chair, Julie McManus (Lab), pointing to investments in conjunction with Greater Manchester Pension Fund in social housing. “Particularly I’d like to look at what we can do on the Wirral.”

Cherry Povall (Con), vice chair of the same fund, added: “Our pensions committee is very keen on investing locally. We’re always looking for opportunities to find things we can invest in. If we had our say, we’d have more than 5%.”

“What’s worked best is when it’s not prescribed … where [funds] have a relative amount of freedom”

Paddy Dowdall

Greater Manchester has long had an allocation of 5% to be invested locally, said Paddy Dowdall, assistant director at Greater Manchester Pension Fund. “My personal experience is what’s worked best is when it’s not prescribed; where the actual investment management is done with guidelines and parameters, but then where they [funds] also have a relative amount of freedom to just seek investment-returning opportunities within the framework of the other objectives,” he said.

At the other end of the country, Neil Mason, LGPS senior officer at Surrey CC, agreed funds need to approach this question with great care. “I’ve got three governors. They are my 120,000 members. They are the 340 employers whose contribution rates are directly related to how we invest the contributions. And there’s the Surrey taxpayer.” Investment decisions need to be driven by their benefit to these “bosses”.

Local impact

Independent advisor Karen Shackleton said funds are becoming more specific about their impact objectives. “Locality has definitely become narrower over the past few years. It used to be UK-wide was fine. Then we started talking about regional and now we’re talking about even closer to the doorstep.

“That of course has ramifications for the return and risk side as well; diversification of the portfolio. I’ve had conversations with my clients where it’s been really quite specific what they want to do. That it’s all around this desire to regenerate a local area or to support small businesses, or whatever it might be,” she said.

Nemashe Sivayogan, head of treasury and pensions at Merton LBC, outlined how her fund has a dedicated UK allocation in the social housing space. But the question of ‘what is local?’ was an important one. Was it just narrowly investing in your geography, looking at opportunities in neighbouring boroughs as well, or thinking more widely? “What does that mean for a local authority?” she asked.

The notion of ‘local’ can generate political tensions, said Hilary Taylor, principal finance officer at Redbridge Pension Fund, part of the London CIV pool. “One of the slight problems we have, being a London borough and being in the pool, is that while it might be nice seeing investment being done in your neighbouring borough, obviously your members want to see the things being done in your borough,” she said.

Independent advisor Dawn Turner said that while it is totally reasonable for the government to ask the LGPS to look for opportunities in this space, there needs to be a quid pro quo, with the government also delivering. In her case, slow investment in nuclear was a particular bugbear.

“We announce things, all governments have done. But then nothing ever happens, it takes so long. So there is an ask there. If you’re looking at it to be driven from the government, the government needs to change its approach as to how it actually gets things done,” she said.

Escalating infrastructure costs

Mr George asked what barriers were preventing panellists from investing more in the UK. “Are we talking about wider things like regulation or the planning system? These big deployments of capital in the UK the government wants – what’s holding that back?” he asked.

“Over the period to 2040, the project should stimulate about £2.9bn to the local Manchester economy”

Drummond Clark

Bureaucracy – the sheer slowness of planning and decision making – was a key barrier for Cllr Carubia. “On Merseyside, we’ve been looking at having a barrage in the Mersey for God knows how many years, since I was a kid, and we still haven’t got it done.”

The escalating cost of infrastructure investment, especially public infrastructure, can act as a barrier, Cllr Povall said. “Things start off at £100m and by the time the thing’s finished it’s £300m. There needs to be some mechanism that says, ‘you’re quoting £100m therefore we’re paying you £100m’. But that just doesn’t seem to enter into things,” she said.

“It’s fascinating to hear all of the issues that have come up,” Ms Bharadwaj said. “Clearly, there are issues about whether it’s London-centric decision-making; projects that are not properly planned; a misunderstanding of setting budgets and what it actually takes to create and build construction projects; a lack of understanding of rolling out capital expenditures, and the time involved.”

Drummond Clark, a vice president at IFM Investors, described IFM’s experience as a shareholder for the past decade in Manchester Airports Group alongside Manchester City Council and nine other councils.

“When the councils decided they wanted to partner with us as a shareholder, it was very important to understand that we had an aligned view of how we wanted to run that business,” he said. “That came down to agreeing that, yes, we did want to run it on a commercial basis; we wanted this to be a profitable enterprise, but also we wanted to take a very long-term view.”

Tangible results of this have included investing £1.3bn since 2017 into the Manchester Airport transformation programme, creating 500 local jobs, sponsoring apprenticeships and sourcing locally. “Over the period to 2040, the project should stimulate about £2.9bn to the local Manchester economy, and around 16,000 additional jobs as well,” Mr Clark said.

Paying pensions

Given the criticism of central government highlighted earlier in the discussion, Mr George asked panellists what they wanted to see it doing better. “What would your ask be of central government?” he asked.

Ms Turner argued the levelling up white paper, while “well intentioned”, had not been clear enough in terms of outlining what problems needed to be solved – and this tended to be a wider problem with the government.

“I would ask them to think a little bit more creatively, logically, and follow through on blended finance solutions,” said Ms Shackleton, adding that if the government was prepared to act as some sort of guarantor, perhaps underpinning the return, that could also make a difference.

“Remember whose money it is,” said Ms Taylor. “It belongs to the people who are paying contributions, the active members, the pensioners. It is not public money, it is a members’ pension scheme. It’s not to fund projects and provide social housing. Its job is to pay pensions. Don’t force us into something that is not necessarily the best thing for our particular pension fund.”

“Our primary responsibility is that we have to pay the pension we promised to our members ,” agreed Ms Sivayogan. “If it is right for our pension fund and our risk profile, we will be happy to invest. But the investigation should be ours.”

As the discussion drew to a conclusion, Mr George asked for any final reflections.

“The LGPS has got a role to look at those [opportunities], even though it shouldn’t be forced into doing that”

Dawn Turner

“I’ll go out on a positive,” said Ms Turner. “There are opportunities out there. And I think the LGPS has got a role to look at those, even though it shouldn’t be forced into doing that.”

“I think pension funds are best placed for long-term investments,” said Cllr Povall. “But we need to have some incentives to do that. And we need to be looking at projects for 15 years not for five minutes.”

Place-based impact investment was possible but difficult, said Mr Dowdall. “Decision-making and governance needs to sit with those accountable,” he said.

“I think the LGPS is a success story when it comes to investing in the UK – and the government can make this a lot easier for us to do,” said Mr Mason.

Long-term view

“My takeaway is that local is definitely becoming more local,” said Ms ­Shackleton. “And that organisations such as IFM need to come up with innovative solutions that deliver to that demand for local while still delivering to the investment advisors’ need to have something that’s diversified and delivering a risk-adjusted return commensurate with the rest of the portfolio.”

“Any projects need to be in the best interests of the underlying members,” said Mr Clark. “I think to achieve that probably the best approach is to take a long-term view, both from the private sector investors themselves and ideally from the government as well.”

“I would say that, irrespective of where you are within the LGPS, there is still a very keen desire to invest in the UK,” said Ms Taylor. “And to invest where we are. So people can see some benefit from their council tax contributions coming back, benefiting residents – but also generally improving the UK as a whole.” But, again, funds needed to be given the flexibility to do the right thing at the time that suited them, she argued.

Concluding the discussion, Phelim Bolger, infrastructure specialist at IFM, told panellists: “I think what’s incredibly positive is that the desire to invest in the UK has come across loud and clear, and a recognition that this is already happening. But also that there is further opportunity to do so.

“The opportunity is that locality – particularly if we can devolve decisions more – creates greater autonomy, greater power within the hands of the administrating authorities to make some of these opportunities happen.

“But there needs to be clarity and a clear direction from the government on what it is they want to achieve without changing the rules of the game on a consistent basis. I think entities like us, through the engagement we have, can make those arguments.”

Concerted efforts are needed to overcome barriers to unlocking UK investment opportunities

The roundtable at the LGC Investment Seminar focused on the government’s ambition for Local Government Pension Scheme funds to increase investments in private markets, including UK infrastructure, particularly in support of local areas, writes Phelim Bolger is an infrastructure specialist at IFM Investors.

Phelim Bolger, an infrastructure specialist at IFM Investors

Despite this aspiration being outlined in the 2022 levelling up white paper, progress is hindered by challenges such as scrapping of the northern leg of HS2, lack of clarity on net zero objectives and potential differences in future government policies.

The roundtable tackled the opportunities and barriers to achieving this shared investment goal. Key themes included the need for collaboration between central and local government, the importance of delivering tangible returns for pension fund members and the desire to invest more in the UK. As an infrastructure manager with more than £5bn invested in the UK and a strong commitment to invest further, IFM strongly supported these views.

Panellists highlighted the complexity of investment decisions, considering factors such as fiduciary duty, risk management and regulatory hurdles. They emphasised the importance of long-term thinking, clarity from the government on investment objectives, and flexibility in decision-making. Local impact is moving to the forefront of discussion. Members of LGPS funds want to feel the benefit of investment in their own areas.

There was consensus about the desire to invest in the UK and support local communities, provided investments align with pension fund objectives and deliver sustainable returns. There was recognition of examples where this has been delivered, such as IFM Investor’s long-term partnership with councils at Manchester Airports Group.

While there is an expectation on the LGPS to find opportunities, there is room for improvement for the government. Suggestions included more definitive guidance, innovative financing solutions, incentives for long-term investments and more autonomy for local authorities in decision-making. Panellists also stressed the need for ongoing dialogue between the government, investors and other stakeholders to unlock the full potential of UK infrastructure investment.

Overall, participants expressed optimism about the opportunities for investment in the UK, but also a recognition of the need for concerted efforts to overcome barriers and achieve progress.

There is a risk that a local focus on investment and impact could outweigh the common objectives shared by many in the LGPS. This could result in benefits of scale being lost. Collaboration, clarity, flexibility and a focus on long-term impact were identified as key principles to guide future investment decisions.