Local authority pension funds cannot be forced to back infrastructure projects via investment pools, the Local Government Association has insisted.
In his speech to the Conservative conference, chancellor George Osborne announced the creation of a National Infrastructure Commission to drive infrastructure projects.
Mr Osborne also said the government’s move to pool the 89 Local Government Pension Scheme funds, announced in his July Budget, would provide some of the investment for such projects.
He said the six LGPS vehicles would be “national wealth pools” that “will invest billions” in infrastructure. He said LGPS funds currently invest “little or nothing” in the asset class.
However, Jeff Houston, head of pensions at the LGA, said the Treasury was unable to actually force funds to invest in any given asset.
Mr Houston, who has been coordinating LGPS funds’ negotiations with central government on pooling, said: “I had a call from [Mr Osborne’s] office before he spoke.
“I have been assured that there is no intention to mandate investment in infrastructure. I don’t see how [the Treasury] could actually say, ‘you must invest in infrastructure’; it will always be a decision about whether that infrastructure project is a good investment or not.
“If you pool investments, you may have access to opportunities that you wouldn’t have as individual funds. The chancellor is looking for an environment where funds can invest in infrastructure more efficiently.”
Brian Strutton, national secretary of the GMB, agreed the Treasury could not force funds to invest a certain way.
“Combining council workers’ pension funds will not lead to more investment in UK infrastructure unless the government underwrites the rate of return available,” said Mr Strutton, who also chairs the LGPS Advisory Board’s cost management committee.
“The only reason more of the LGPS assets are not invested in infrastructure is because the risk outweighs the returns.”
Rob Whiteman, chief executive of Cipfa, added: “We need to be extremely cautious that LGPS investment returns are not compromised by thoughts of compulsory investment in local or regional infrastructure from which the returns may be much less certain. All investments with pensioners’ contributions must be on investment-grade proposals and never on vanity projects that cannot attract investment from the market.”
According to the most recent LGPS Advisory Board report, investment in infrastructure in March 2014 stood at £547m; around 0.3% of the £180bn assets the scheme holds.
The Pensions Infrastructure Platform (PIP), a business developed by a group of public and private sector pension funds to encourage infrastructure investment, welcomed the chancellor’s speech.
Mike Weston, chief executive of the PIP, said: “The PIP has already helped schemes, including local authority pension funds, make over £1bn of commitments to invest in UK infrastructure projects.”
However, he added: “For the commission to be successful in attracting further pension fund investment in UK infrastructure, it must remember that pension funds will only invest in suitable projects. The commission will need to encourage the government and the market to structure projects in such a way that it makes sense for UK pension funds to invest.”