Levelling up push may hit investment returns, warns UK pension chief

A UK government push to persuade local authority pension funds to plough billions of pounds into levelling up projects may conflict with trustees’ duty to secure the best returns for pensioners, one of Britain’s largest town hall schemes has warned.

Gordon Ross, chief investment officer of LGPS Central, told the Financial Times that any required target to invest in projects aimed at regenerating needier areas of the country “may not always align” with schemes’ investment obligations. LGPS Central, which invests on behalf of a pool of eight local authority pension funds in the Midlands, has a combined £55bn of assets.

His comments come as the government prepares to publish its plans for increasing local investment through town hall funds. Ministers have set out plans to tap more than £16bn of cash in local authority pension funds by setting an ambition for these retirement schemes to invest up to 5 per cent of their portfolios in projects that help “level up” poorer areas.

The proposal — first outlined in a government White Paper last year and reiterated in the Spring Budget — is part of a wider push by the government to unleash capital held by institutional investors, such as leading retirement funds, to help drive fresh investment into local projects, such as infrastructure, housing, regeneration and small business finance.

“LGPS funds are global investors and their governing bodies have to ensure that their investments will meet their fiduciary duties and provide the outcomes that fund members and employers need,” said Ross.

“As such, mandation of any specific investment or asset class may not always align with these needs, and every investment will need to be looked at very carefully through a risk and return lens.”

The £342bn Local Government Pension Scheme (LGPS) — which serves around 6mn council workers in England and Wales — invests in a wide range of assets, including in the UK and globally.

Ross said many town hall funds already had investments in the UK and added that allowing funds to invest in levelling up projects around the country, rather than just locally, would open “a broader set of opportunities”.

Investment consultants to local government schemes said many town hall funds were already investing in projects, such as social housing and infrastructure in the UK.

But they noted that unlike other public sector pension plans, such as the NHS, teachers and firefighters, which are funded by taxpayers, pensions for local council workers are funded by contributions from scheme members and sponsoring employers or local councils. More than 18,000 employers participate in the LGPS in England and Wales.

“Investment returns are therefore very important for local government schemes,” said Iain Campbell, senior investment consultant with Hymans Robertson, a professional services firm.

“Every pound not earned from investments means a pound of contributions that may have to come from members, or employers. For the councils, this may mean less money to spend fixing potholes.”

The Department for Levelling Up, Housing and Communities said further information on its proposals would be published “in due course”.

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