Gemma Bourne, managing director at social investor Better Society Capital, reflects on the pivotal role of local government pension schemes and combined authorities in advancing inclusive growth in the UK.
There has been much discussion in the UK around what inclusive growth might look like for local places, but little on how this growth can be delivered and who is best suited to deliver it. Two of the most important stakeholders, though often not linked, are local government pension schemes (LGPS) and regional governments, in particular combined authorities.
Like many organisations, these organisations are facing the need to adapt to change. LGPS are currently undergoing further pooling and building internal capability to deliver local investing while combined authorities are publishing their local growth plans. Between them, they manage and spend billions of pounds, have deep local knowledge and a shared stake in the sustainable prosperity of their local places. The outcome is that there has never been a better time for them to explore local investment partnerships.
At the core of the UK government’s policy priorities has been a vision to shift power from Westminster to local regions and leaders. Recent reform proposals aim to make it easier for regional mayors to spend money locally and flexibly, create consistent service delivery boundaries and a means to get the things done that will benefit local people. As part of this, they will be considering how to crowd in extra institutional capital to make their own funding pots go further.
Separately, following the Fit for the Future consultation process led by the government, there is an increasing recognition of the role of LGPS in boosting long-term investment into local communities.
The LGPS manages almost £400bn (€461bn) of assets nationally, with a statutory duty to secure strong, risk-adjusted returns for members. Individual LGPS funds have historically made place-specific investments into local projects, directly or through co-investing with partners or intermediary fund managers. The ongoing pooling of funds will see greater economies of scale and lower costs, and crucially the building of their capability to find, make and manage local investments.
When you put these together, the potential for investment partnerships is huge because it means that place-focussed policy and funding derived by local need, local governance and capital can truly work together to deliver investment where it is needed the most. The further opportunity is that social impact investment can bridge these two interests because not only it is inherently local – it genuinely addresses the needs of communities and is delivered by organisations with ‘boots on the ground’ who understand those needs and how to address them.
Navigating this potential collaboration isn’t easy. LGPS funds are rightly cautious about fiduciary duties, and combined authorities are not always geared toward propositions that meet pension fund requirements. What’s missing is a consistent bridge which can convert public sector regeneration plans into risk-calibrated investments with measurable social and environmental returns.
And, this is where social impact investment comes in. This form of investment sees the channelling of money from social investors like Better Society Capital partnering with both private capital sources from institutional investors, trusts and foundations, family offices and high-net worth individuals and public sector funding from government, to tackle the country’s most pressing social issues.
With targeted collaboration, we could see LGPS investment working in partnership with development institutions such as the National Wealth Fund and British Business Bank, institutional investors and private capital to invest in funds aligning to the local priorities and delivering better local outcomes as set out by the Combined Authorities.
We are already seeing examples of what this could mean in the market. Greater Manchester Pension Fund (GMPF) has invested £20m into the social impact property fund manager Resonance’s National Homelessness Property Fund 2 (NHPF2), which works to acquire and refurbish properties and leasing them to charities and housing associations, which then provide people at risk of homelessness with a settled home. This model provides a local solution to a national problem and has housed over 3,600 people since inception over thirteen years ago.
This is just one example, there are more investible opportunities out there and the social impact investment market is valued at more than £10bn and is growing.
One of these growth areas is the social outcomes contracts market following the government’s recent announcement of the £500m Better Futures Fund. Social outcome contracts are currently an under-utilised local investment approach to public service delivery for individuals with complex needs. Whereby, local investors provide upfront capital to fund interventions, service providers deliver programmes designed to achieve specific outcomes, and government pays investors based on the measurable social improvements achieved to deliver a risk adjusted return for investors. With this kind of government support, the model is set to deliver £1bn of local outcomes and help combined authorities realise their plans for their local places.
The alignment is there and the future for collaboration between LGPS and combined authorities looks bright. There is no time like the present to work together, build local investing partnerships and make a real difference to local people’s lives whilst delivering returns for pension holders.
Gemma Bourne is managing director at Better Society Capital.
