The recently elected Labour government and its ambition to attract LGPS investment in the UK were on the agenda at Room151’s national renewable Roundtable held in advance of the 16th Annual Latif Summit.
At the beginning of September, UK chancellor Rachel Reeves set out the government’s Call for Evidence ahead of an upcoming Pensions Investment Review.
While details of Labour’s plans are not yet confirmed, there is a widespread sense that the Local Government Pension Scheme (LGPS) is at the cusp of significant changes.
This strategy presents both fiduciary challenges and opportunities for LGPS funds as they balance their responsibility to pensioners with the government’s push for greater investment in UK-based assets, such as infrastructure, housing, and venture capital.
Political changes and government intentions
Labour’s goal to direct pension investments into domestic projects is partly aimed at offsetting the restricted government borrowing capacity.
LGPS and defined contribution (DC) schemes are seen as key vehicles for this, but as Jill Davys, head of LGPS at Redington, pointed out, there is scepticism whether Labour is truly open to influence or has already made up its mind on its course of action. “It’s nice that they are including funds in those discussions,” Davys said, “but again, it’s whether it’s face value and how much notice they’re actually taking of those conversations.”
Davys also predicted that the new government might show a greater willingness to mandate certain investments compared to its predecessors.
This initiative, driven by Labour’s desire to reduce borrowing while fuelling the UK economy, highlights a critical dilemma for LGPS practitioners. While it could lead to more local impact, it also increases the risk for pension funds, especially if government-mandated projects do not align with their risk and return objectives.
Funding vs financing
One of the central challenges discussed was maintaining fiduciary responsibility in the face of potential government pressure to prioritise UK investments. Luke Webster, CIO at the Greater London Authority (GLA) argued that LGPS investors would have to justify their commitments based on risk adjusted returns. “If these opportunities are not in line with the Sharpe ratio you could achieve elsewhere, then you’re on dicey ground doing it without some form of support,” Webster noted.
He also warned that policy makers tend to obscure the difference between funding and financing. While private investment was often put forward as a permanent funding solution, investors would consider this as a financing transactions with the investment ultimately needing to be paid back against an appropriate risk adjusted return.
Jeremy Hughes, deputy board secretary at the Local Government Association, echoed this sentiment, warning that trustees are concerned about how these investments could potentially expose them to legal and financial risks if returns fall short. He argued that trustees have a duty to safeguard pensions and ensure that the funds perform as required to meet their long-term obligations, adding that “fiduciary responsibility for the trustees means that if these investments don’t deliver, they are at risk.”
The conversation also touched on the lessons learned from past experiences, such as the controversial Public Finance Initiative (PFI) projects. While these delivered much-needed infrastructure, the long-term financial implications were significant. “There were substantial projects, including hospitals and schools, but some councils are now renegotiating PFI deals 20-25 years on because they’re paying back three or four times the cost of the original assets,” noted councillor Joshua Garfield from the London Borough of Newham.
Consolidation and pooling of funds
The Labour government has also hinted at the potential consolidation of LGPS funds, sparking a debate about the pros and cons of pooling. Richard Harbord, chair of the Pension Board for the London Borough of Harrow and strategic director and section 151 officer for Barking an Dagenham expressed concerns about further consolidation of pools.
“Merging pools may seem efficient, but you lose local insight and decision-making, which could lead to missed opportunities for more localised, high-impact investments.”
Participants of the roundtable argued that the long-term cost savings of pooling were often overstated. Jill Davys pointed out that while pooling has been touted as a cost-saving measure, the reality has been more complex: “The assumption that the bigger the pool is, the more cost-efficient it is, isn’t always true. You lose that local specialist knowledge, and that could ultimately affect long-term returns” she warned.
Private markets and infrastructure opportunities
One of the opportunities discussed was the potential for LGPS funds to invest more in private markets, particularly infrastructure. Asad Rashid, research consultant at Hymans Robertson, emphasised that “the ambition from the government is to have LGPS and DC schemes invest in UK assets, with a focus on infrastructure and venture capital.
Yet higher risk assets such as greenfield infrastructure or venture capital might not always be suitable for the LGPS, where most funds are now enjoying healthy funding levels and are keen to lock in steady income streams.
Rashid pointed out that infrastructure investment, especially in areas like affordable housing, offers inflation-linked returns and stable cash flows, making it an attractive option for pension funds.
However, he also noted that capital is not the only limiting factor when it comes to infrastructure investment. “The limiting factor is planning permissions and over-regulation,” he said. “If the government can address these non-financial barriers, it would make UK assets more attractive for both domestic and international investors.”
Webster proposed a solution to mitigate fiduciary risks in government-directed investments: “The government could tweak the duty of LGPS funds so that, alongside financial returns, they also have impact goals,” he suggested. To manage the risk, the government could provide guarantees. “If these projects don’t meet a specified return, a government backstop could ensure that pension funds don’t suffer financially.”
Learning from past mistakes: avoiding a new PFI
The roundtable revisited the issue of the PFI scheme, with several delegates pointing out the financial strain it placed on local authorities. Despite its success in delivering essential infrastructure, PFI deals became notorious for their long-term costs. Webster remarked, “You distinguish between underwriting the project and underwriting the schemes. The current government focus has been on project guarantees, but what might be genuinely radical is providing guarantees at the pension scheme level.”
The group agreed that any new initiatives must avoid repeating the mistakes of PFI, where risks were underestimated, and local authorities were left with substantial debts. “You have to look at the outcomes holistically,” said Webster. “Yes, PFI delivered projects, but the costs were enormous.”
Outlook: balancing the risks
Being pressed on the key policy steps Labour could take to attract greater investment, participants agreed on the need for stable, long-term policy directions. Davys commented on the policy environment, saying, “We’ve had policies that have changed from almost one week to another… that makes it a really difficult environment for pension funds or anybody else to invest in.” She noted that Labour’s majority could offer the opportunity for more consistent policies, allowing funds to adapt to clear and stable rules.
Looking forward, there is optimism that Labour’s review of pension schemes, led by Rachel Reeves, will provide greater clarity. However, the delegates were cautious about the potential for overly prescriptive mandates from the government. As Hughes summed up, “If the government is encouraging pension schemes to invest in these asset classes, they must provide the right mechanisms to balance the risk for pension funds.”
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