How far have we come with LGPS infrastructure investment?

It made it clear that an allocation closer to 10 per cent would be more satisfactory. This was met with resistance in some quarters, whilst receiving a cautious welcome in others.

From a fiduciary duty perspective there was understandably no appetite to invest in projects, UK-based or overseas, unless they made sense in investment terms.

At that time the general consensus was that a UK-wide national infrastructure platform would be needed to achieve a meaningful increase in infrastructure investment by LGPS funds.

While that has not yet materialised, progress has been made. We have seen a proliferation of approaches, with some funds increasing their existing commitments to infrastructure, some creating new allocations, and others setting up collaborative partnerships with other funds.

Third party infrastructure managers have sensed opportunity and done their utmost to attract or retain LGPS clients, partly by offering preferential fees via aggregation of commitments on either a pool-wide or LGPS-wide basis.

Direct access to infra projects

In the meantime, a cross-pool infrastructure work stream has sought to understand the requirements of its constituents and weave the different strands into a coherent strategy, with one objective being to find a route for LGPS funds to invest directly into infrastructure assets.

To be successful in direct infrastructure investing, it is imperative to be able to rigorously assess investment opportunities, do the due diligence and make a binding decision quickly and efficiently. The governance structure of any pooled infrastructure solution will be vital to its success.  

This means that the creation of the national platform, whatever form it takes, is unlikely to be possible until the pools themselves are up and running and can provide adequate governance and oversight.

Notwithstanding this, there are already a number of new collaborative groups in the UK investing in infrastructure on behalf of pension funds, such as the Pensions Infrastructure Platform and GLIL, a joint venture set up by Greater Manchester Pension Fund and the London Pension Fund Authority.

Both have started to invest directly in infrastructure deals. Both could potentially have a part to play in a national infrastructure platform, but it would need to be demonstrated that they were properly aligned with the requirements of all the LGPS participants.

Don't be afraid to go global

The progress made by the LGPS in finding a way to increase its exposure to infrastructure has been impressive.

Individual funds have increased their target allocations, pooled resources to do deals, and negotiated better terms with fund managers. And all, so far, without the benefit of a national platform.

They have also been resolute in the face of pressure from government to direct their investment to infrastructure projects in the UK. Most have adopted a global approach, or at least a Europe-wide approach.

Some would argue that this is somehow letting the side down; the UK has a chronic need for investment in its creaking infrastructure, so why can’t the LGPS provide it?

I would argue that the LGPS can often get better risk-adjusted returns elsewhere, and that this should be their primary concern. And why should hard-pressed UK tax-payers and users of UK infrastructure fund the relatively high returns demanded by LGPS investors? They could instead be funding the low returns accepted by gilt investors, if the government would borrow to invest.

This is a question that George Osborne failed even to acknowledge. But he has gone and the LGPS is still here, quietly pooling its resources and building its capabilities and expertise.

It is looking for opportunities to put these to use not only in the UK, but wherever in the world it can find assets that help meet its obligations to members – which is as it should be.

John MacDonald is a senior investment research consultant at Hymans Robertson.