Social infrastructure plays a key role in the long-term asset allocation of the UK’s local government pension funds, according to a new study.
Sixty-three percent of Local Government Pension Schemes (LGPS) in the UK regard affordable housing as the most important area for social impact, a survey of 27 schemes, which manage more than £230bn (€194bn) in assets collectively, found.
Close to three-quarters of local pension funds cited the risk-return profile and diversification benefits as the main drivers for investing in social infrastructure, according to research from investment manager Octopus Investments and pensions industry forum mallowstreet.
Just over one-fifth of the funds said they were worried about illiquidity, with a similarly low percentage concerned about the lack of transparency around asset valuations, or political, election or re-election risk when it comes to dealing with local authorities.
Jack Burnham, head of affordable housing at Octopus, said it was “great” that the vast majority of local pension funds consider affordable housing as the most important area for social impact. “However, aside from the impact, the sector offers resilient, risk-adjusted financial returns too. In general, affordable housing has low correlation to other property markets and the wider economy.”
One challenge exists around fiduciary responsibilities however. Almost half of the schemes cited the potential clash with fiduciary duty if impact is being specifically targeted as their main concern. Researchers argued that this potential conflict may be “more of a perception, as we are increasingly seeing that creating impact and delivering strong returns to investors are not mutually exclusive”.
Other areas of focus
While healthcare may not be top of their list, Mike Toft, head of care homes at Octopus, said he expects it to become a “growing area of interest when it comes to social impact investing”, because of a widening lack of quality elderly care beds for an increasingly ageing population in the UK.
“Addressing this societal need will also reduce bed blocking pressures on the NHS, in turn, supporting the wider healthcare ecosystem”, Toft said, referring to the UK’s universal healthcare provider.
Almost all of the LGPS schemes (96%) said they invest in clean or renewable energy. Sixty percent have allocations in both affordable housing and healthcare, while a “higher than expected” 40% said they invested in natural capital.
“The shortage of homes in the UK, whether that’s care homes or affordable homes, continues to be a problem which is unlikely to be solved by government funding alone,” said Ally Georgieva, head of insight at mallowstreet.
Given the widening investment gap “it is encouraging to see support for collaboration between asset owners and managers, in efforts to come up with viable solutions that can benefit all stakeholders”, Georgieva said.
