Osborne's wealth funds target LGPS cost savings to boost infra

Osborne unveiled the plan at the Conservative party conference in Manchester on Monday. The six funds will each have assets of around £25bn and the move is expected to save on the running costs for local government pension schemes.

What we’re looking at here is building new projects, and that’s somewhere that pension funds have been wary of investing in the past

Raj Sharma, Pinsent Masons

It was accompanied by plans to change planning rules for brownfield sites, accelerating sales of government land and buildings, and the creation of a National Infrastructure Commission to assess the UK’s long-term infrastructure needs.

In his speech, Osborne said: “At the moment, we have different local government pension funds with 89 sets of fees and costs. It’s expensive and they invest little or nothing in our infrastructure.

"So I can tell you today, we’re going to work with councils to create instead half a dozen British Wealth Funds spread across the country. It will save hundreds of millions in costs, and crucially they’ll invest billions in the infrastructure of their regions.”

Outlining the details on his four-point plan for infrastructure on the government's website, Osborne said that of the LGPS's £180bn of assets, only 0.5 per cent is currently invested in the asset class, adding: "In countries with larger pooled public pension funds, up to 8 per cent of assets are infrastructure and 17 per cent are housing and infrastructure."

Sir Merrick Cockell, chairman of the board for the London Pensions Fund Authority, said in a statement: “For some time we have been calling on government to take into account the resources of the LGPS and invite UK funds to invest in these UK projects.

"While we await the detail behind this announcement, we are already well underway in forming partnerships with other funds.”

Carving up the regions

The newly formed National Infrastructure Commission said the existing 89 local authority pension funds will be "pooled" into half a dozen funds. However, Mark Packham, head of public sector pensions at consultancy PwC, said this does not necessarily mean those schemes will cease to exist but rather they could feed into the new wealth funds.

He said: “I don’t think there’s a sense that this speech in itself foreshadows simply putting [the LGPS schemes] all into six [funds]."

It’s entirely consistent with what has been said by government over the past few months

Mark Packham, PwC

Packham added that rumours of an announcement had begun to circulate among LGPS schemes in the days leading up to the announcement.

“It’s entirely consistent with what has been said by government over the past few months,” he said.

Investing in local infrastructure has been on the agenda for some local government schemes for years now, with mixed results. But some queried what restrictions the funds might face under the new regime.

Raj Sharma, head of the pension investment team at law firm Pinsent Masons, said: “Does that mean if you’re in the northwest you’re only going to have access to the sovereign wealth funds they created for the northwest?”

He added: “What we’re looking at here is building new projects, and that’s somewhere that pension funds have been wary of investing in the past.”

Cost to taxpayer

Infrastructure is well established as a pension scheme investment, with increasing numbers of schemes investing in real assets due to low gilt yields, but Mick McAteer, co-director at think-tank the Financial Inclusion Centre, said the government’s proposals would ultimately increase the cost to taxpayers.

“By definition, it has to be more expensive than funding it through gilts... The risk premium that long-term investors would demand means it is a more expensive way of funding infrastructure, especially with government bond yields so low.”