A new report highlights routes to partnerships between the UK’s local government pension schemes and the growing number of fund managers operating in the place-based investment space.
Close collaboration and the development of solutions tailored to local requirements will be crucial if the UK’s local government pension schemes are to successfully direct more funding into place-based investing, according to a new report backed by the sector.
Published by impact advisory firm The Good Economy, the report – Scaling-Up Local Investing for Place-based Impact – was sponsored by the UK’s Local Government Pension Scheme (LGPS), whose underlying local authority pension funds manage some £400bn (€462bn) in assets.
The work was supported by seven of the UK’s current eight LGPS pools – Border to Coast, Brunel Pension Partnership, LGPS Central, Local Pensions Partnership Investments (LPPI), London CIV, Northern LGPS and Wales Pension Partnership. These include nearly all local pension fund administering authorities in England and Wales.
Developing expertise
The Good Economy said the report was designed to provide a framework for local government pension funds to develop expertise in place-based investment, expertise that would allow them to collaborate effectively with each other and the growing number of fund managers operating in the space.
“Pretty much all the pools came on board to support the report, and they really got quite actively involved in reviewing the draft and commenting and thoughtfully engaging with the process. So, it has been a genuinely collaborative effort,” Sam Monger, head of place-based impact investing at The Good Economy, told Impact Investor.
Momentum for this collaboration has been provided by UK central government reforms to pension funds and local government frameworks, as outlined in its Pensions Investment Review of the LGPS, which pushes for more local investment by the funds.
These reforms are seen as vital to the development of a more robust, sustainable and inclusive domestic economy at a time when both UK national and local governments have limited financial resources. By adopting a more decentralised approach to funding and project implementation, the government hopes to direct more investment towards areas such as affordable housing, infrastructure, clean energy and the social economy, in tandem with private fund managers.
Strategic framework
The report aims to help LGPS capital to support so-called Local Growth Plans, which Strategic Authorities, such as regional mayors’ offices, have been asked to develop based on the needs of the local economy. The LGPS pools will then be required to produce investment strategies to help achieve the goals of these Local Growth Plans.
“What we are trying to do with the paper is give the pension schemes a framework that enables them to respond to the policy challenge. So, if you haven’t done this before, how do you get started? Here are some principles you could work from and here are some case studies you can draw from,” Monger said.
He also highlighted valuable input from fund managers covering the range of asset classes relevant for local investing and private market activity, who supported the report.
These include Amber Infrastructure, Bridges Fund Management, Civitas Investment Management, Foresight Group, Gresham House, Igloo Regeneration, Knight Frank Investment Management, L&G Mercia Asset Management, Newcore Capital, Savills Investment Management and Thriving Investments.
The report includes case studies showing how some of these institutions have worked with local government pension schemes to provide investment opportunities in the local economy.
A tailored approach
The paper concludes that a tailored approach to local investing by the pools is required, given differing economic and social priorities, governance models and delivery capacity across the country. However, the authors stress that collaboration between the LGPS and a range of stakeholders – including with Strategic Authorities – central government agencies and other institutional investors, would also be needed to realise the full potential of place-based investing.
“The sector needs to collaborate and learn from experience, rather than trying to reinvent the wheel in multiple places at the same time. It means being smart about leveraging existing knowledge and working together to create standardised approaches,” Monger said.
Part of that effort would be the creation of a common impact reporting standard for the LGPS sector to ensure consistency, comparability and transparency of impact reporting, as well as stakeholder accountability for the economic, social and environmental impact of local investing, according to The Good Economy.
Positive social outcomes
Frances Deakin, head of responsible investment at LPPI, said the report provided “a great opportunity to collectively inspire and support the pension funds and pools that will be navigating local investments together”.
“The government has identified the LGPS as an engine for economic growth – delivered, in part, by funds setting local investment targets and considering local growth plans when developing their strategies. LPPI know first hand that local investment can finance retirement benefits and deliver positive social outcomes, but achieving dual outcomes requires investment strategy to be specific about the balance between different objectives,” he said.
Simon Cunnington, portfolio manager, UK Opportunities, at Border to Coast Pensions Partnership, said UK investment was already a major focus for his pool, with 31% (£12.1bn) of its investments already being made within the country.
The institution recently launched a UK Opportunities strategy aimed at investing in UK productive assets across infrastructure, real estate and commercial finance.
“With many of our partner funds leading the way on innovation in local investment, this paper provides a useful framework to support our continuing discussions with our partners and wider market participants as we move forward with the government proposals,” he said.
The Good Economy said it planned to publish sector-specific summaries providing further guidance on tailoring and implementing the local investing framework to different sectors.
