Rachel Elwell, chief executive of Border to Coast Pensions Partnership
Delivering for the Local Government Pension Scheme and supporting the pensions of more than six million members will always remain a collective priority. Indeed, the cost-effective payment of those pensions is already fulfilling a vital policy imperative.
It is important not only for members – who far from being recipients of ‘gold-plated’ payments are, on average, lower-paid part time workers, with an average pension of £5,000 per annum – but for taxpayers, too, with the cost of that pension being around 50% of the equivalent cost in other vehicles.
Yet this is a transformational time for the LGPS, one which will require all of us to adapt. Government is set on pursuing reforms that seek to “unlock the investment potential of the scheme”; our collective role is to ensure those reforms keep the best interests of funds and members front and centre.
To do that successfully over the long-term, I believe we must continue to help the government better understand the needs of asset owners. This is particularly important in the face of increasing pressure to more actively invest in the UK.
At Border to Coast, our partnership is a major investor in the UK, with 23% of our £65bn assets invested here. These include everything from start-ups to fast-growing and established businesses, as well as infrastructure across the likes of energy, social care, transport, education and life sciences.
In this context, our recent report Unlocking UK Growth analyses the opportunities and barriers to greater pension investment in the UK. To boil down what are often complex and multi-faceted issues, one overarching theme is clear: we need a whole of system approach to solve the growth challenge.
Role of LGPS
Pension capital, including the LGPS, has been identified as one of many potential solutions.
As one of the few large defined benefit schemes still open to new members and with £425bn in assets, it is true the LGPS is well-positioned to contribute to the UK’s economic ambitions. It has collectively already invested more than £120bn in the UK – without mandation – and the various pooling models have enabled more LGPS funds to invest at scale in complex asset classes such as infrastructure and private equity.
That scale also enables more of the LGPS to access smaller, local investments more effectively. With a larger pool of assets comes a greater ability to diversify risk and to put more capital work in the UK. However, this isn’t just about supply of capital – it’s also about developing the supply of investments that meet the needs of asset owners.
The key takeaway from our report, which draws on interviews with industry experts, fund managers and senior executives from across the investment industry, is that there is no lack of institutional appetite to invest in the UK – in fact there is significant opportunity in our demand for infrastructure investment and thriving entrepreneurial spirit.
Removing barriers
But investment has been constrained by structural barriers. We need an approach that looks beyond mandates to address those barriers and helps unlock the flow of long-term capital into high-growth areas of the economy.
Investors such as LGPS pools … need predictability and transparency to allocate confidently to these types of assets
The barriers we heard about are complex and specific to individual asset types. But with concerted action and a strong partnership between the public and private sectors, they can be addressed.
For example, in infrastructure, investment is hindered by the uncertainty created by the UK’s complex planning system and historical changes in government policy, such as the green transition timeline. Investors such as LGPS pools, which are stewarding pensions for the long haul, need predictability and transparency to allocate confidently to these types of assets.
A more stable policy environment would go some way to addressing these challenges, alongside rapid passage of supply-side reforms like the government’s Planning & Infrastructure Bill. The government should also look at measures to crowd in investment, such as the use of targeted ‘catalytic’ investments using blended finance, by bodies like the National Wealth Fund and tax incentives akin to the contracts for difference programme which was integral to the rollout of renewable energy infrastructure.
Conditions for disruption
If the story for infrastructure is providing stability, in private equity it’s about creating the conditions for disruption. Barriers here include the statutory duty on pension funds to cap fees, which ignores the additional returns that specialist investments with higher fees can deliver, and the underdeveloped UK-focused asset management ecosystem.
The LGPS cannot solve these challenges alone
In order to create a UK-based private equity ecosystem that can attract pensions capital, the government and regulators should look to provide greater clarity on how pension schemes should assess value for money in their investments, focusing more closely on net returns – and I’m pleased to see this included in the Pension Schemes Bill.
Alongside this, a review of the numerous public bodies which support investment – from the British Business Bank, to British Patient Capital and the National Wealth Fund – and targeted tax and performance incentives, would help give investors clarity and build up our domestic, UK-focused asset management industry.
Crucially, the LGPS cannot solve these challenges alone. Unlocking the full potential of pension capital to drive UK growth will require coordinated effort across government, regulators, the investment industry and asset owners. But the rewards for getting this right are significant.
With the right policy and market conditions, billions of pounds in long-term capital could be unlocked for productive assets – supporting both economic growth and better retirement outcomes for millions of people.
The impact could be transformative: more resilient public finances, stronger returns for pension savers, and a more dynamic, investment-ready UK economy.
Rachel Elwell, CEO, Border to Coast Pensions Partnership