Councils would be free to pump as much as £22 billon more of pension fund investments into infrastructure.
This is supporting the government’s ambitions to build more homes, roads or high speed railway under proposals announced by local government secretary Eric Pickles today.
The proposals would potentially allow councils to double the amount they can legally invest from their pension funds directly into key infrastructure projects in a new and more efficient way that ensures long-term value for the taxpayer.
Investment in infrastructure is a vital part of the government’s economic growth strategy. Innovative approaches that increase the amount of finance available for projects are needed to back ambitions for the economy and to help manage the inherited deficit.
The local government pension scheme for England and Wales is administered by 89 separate local funds that hold combined investment assets worth £150 billion.
Pension fund rules are there to make sure investment risks are spread across different types of investments to give taxpayers long-term protection. Fund managers are currently limited in the amount they can invest via partnership arrangements, which includes many types of infrastructure investment.
The proposals published for consultation today include an option to increase the current limit of 15% to 30%. This would clear the barriers standing in the way of better council investment giving them the scope to inject up to £45 billion in such arrangements.
Eric Pickles said:
“Unlocking town hall pension pots so they can be used to invest in vital infrastructure projects is a common sense decision that will help this country complete on a global scale and get Britain building.
“By lifting the restrictions controlling local pension investments councils could pump a further £22 billion directly into job-creating infrastructure projects that will boost our economy.
“This is potentially a huge development and investment opportunity we simply cannot afford to ignore that also allows us to maintain long-term value for money for the taxpayer.”
A recent report by the Future Homes Commission said council pension funds could be used to build key infrastructure projects like new homes in the UK without increasing the government deficit.
Investment decisions remain for individual local pension funds, which have a duty to protect the local council taxpayers, and local services and to ensure that there are no conflicts of interest.
In November 2011, the HM Treasury, the National Association of Pension Funds and the Pension Protection Fund signed a memorandum of understanding. All parties agreed that there is the potential for mutual benefit for the government and pension funds to facilitate investment in infrastructure. The parties agreed to work together to help establish the arrangements necessary for efficient and appropriate investment in UK infrastructure assets. The Pension Investment Platform aims to raise funds from both public and private sector pension schemes.
Two local authority pension funds, Strathclyde Pension Fund and West Midlands Pension Fund, are among the 6 founding investors already involved in the Pension Investment Platform.
The consultation Local government pension scheme: investment in partnerships, applies to England and Wales only. It will run for 6 weeks from 6 November until 18 December.
Subject to the outcome of consultation, the proposals would relax the current investment regulations the ‘Local government pension scheme (management and investment of funds) regulations 2009’.
Investment decisions are decided by individual local pension funds based on long term returns, which have a duty to protect the local council taxpayer, and local services and to ensure that there are no conflicts of interest. Diversified investment portfolios reduce risk to the taxpayer. This will help to minimise the impact of managing pension costs, stabilise the level of employer contribution rates and limit local taxpayers’ exposure over the medium to long term.