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Infrastructure investment ambitions in jeopardy

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LGC’s commentary on the latest pensions red tape

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Council pension funds have succeeded so far in buddying up into groups and pooling their investments. Though most pools have not yet taken on member funds’ money and committed it to markets (‘gone live’ in investment parlance) all funds have joined a pool and most pools have had written approval for their plans from ministers.

Bringing together the funds to cut money spent on investment manager fees was stage one of former chancellor George Osborne’s plan for Local Government Pension Scheme funds. Stage two was directing a larger chunk of LGPS money towards infrastructure than is currently allocated.

Stage two has its own stumbling blocks. Infrastructure investment can offer double-digit returns but the complexity of the investments necessitates expensive due diligence and scale that is beyond many LGPS funds. Funds banding together, it was believed, could overcome some of these problems.

But that’s not the only challenge. Funds have not been excessively keen to invest in particular assets just because the government has told them to, rather than because they fit well into funds’ portfolios. There have been complaints of a lack of suitable opportunities. Then there are the practicalities. Should pools invest in infrastructure on a pool-by-pool basis, or should all pools gang together to invest via one national platform?

And while the scheme is busy working out the nuts and bolts of its infrastructure duty, the whole endeavour could be rendered moot by the Financial Conduct Authority’s latest update to its Conduct of Business Sourcebook.

The authority is refreshing its rules in response to an update to the EU’s Markets in Financial Instruments Directive II. MiFID II, due to take effect in a year’s time, set out different categories of investors. The FCA in turn has proposed to place local authorities, and local authority pension funds, into the ‘retail’ client category. Retail clients are considered less sophisticated than ‘professional’ clients and therefore prohibited from buying into ‘complex’ investments such as – you guessed it – infrastructure.

It is incumbent on investment managers to ensure their clients are professional before selling them anything too racy and LGPS funds would, under the proposals, be able to ask managers to consider treating them as professionals. But investment managers might not necessarily do so, or might not engage with LGPS funds on the same terms (read: at the same price) due to the extra inconvenience and expense of having to assess the funds’ levels of investment experience.

Various LGPS bodies have made their displeasure known. The Pensions and Lifetime Savings Association, a membership body that includes many LGPS funds, went straight for the jugular, claiming the new FCA classification would scupper the government’s plans for more LGPS infrastructure investment, and might even jeopardise the £2.7bn of infrastructure in which the scheme already invests.

The LGPS Advisory Board warned that the reclassification was “unnecessary” and would “have serious consequences” for funds’ investment strategies in general. LGPS funds invest in a variety of complex assets, so it’s not just infrastructure at stake. In fact, the government just last year delivered a long-awaited set of less prescriptive regulations allowing LGPS funds to take on sophisticated asset classes as befitting investors of their level of expertise.

It would be unfortunate if, when the FCA publishes its final pronouncement on the matter in Q2 this year, it were to hamper the freedom for which LGPS funds have waited so long, and the government’s infrastructure ambitions, in a single stroke. 

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