The future of Local Government Pension Scheme domestic infrastructure investments was examined at a roundtable discussion in partnership with GLIL Infrastructure. Nic Paton reports.

‘What next for UK infrastructure investment?’ That was the question on the agenda as LGC, in association with GLIL Infrastrucure, convened a high-level panel of Local Government Pension Scheme practitioners at the LGC Pensions & Investment Summit in Birmingham.

Opening the discussion, which took place at September, Martin George, LGC deputy editor and chair of the event, reiterated that the Labour government “clearly sees a really big role for pension funds and the LGPS in delivering its economic goals, its infrastructure goals”.

What, then, were the opportunities to invest in UK infrastructure, he asked. “And what do we, as the LGPS, need to ask of the government to enable us – and them – to achieve the goals we have in common?”

In terms of ‘asks’ of the new Labour administration, they can be summed up in one word, pointed out Ted Frith, chief operating officer for GLIL: clarity. “Our main ask of the government is clarity of thought and policy, and its objectives over the next five years; actually, much beyond the next five years,” he said.

Nevertheless, the change in ‘mood music’ since the election had been significant, he said: “What I’ve seen so far in the last two months is an amazing willingness to engage with people from the new administration that we didn’t see previously.

“In the last week alone, GLIL has met the energy minister, the secretary of state for the environment, the financial secretary to the treasury and the water minister. The door is open; they want to talk to people, and I think we should use that opportunity,” he added.

‘Enthusiastic about infrastructure’

Andrien Meyers, chief proposition officer at the London CIV, which pools the assets of 32 LGPS funds in the capital, pointed out that moves such as the creation of a National Wealth Fund could be positive, but the devil will be in the detail.

“What that might look like, we’ll wait and see. But our assumption is probably that we are talking about real assets rather than the liquid assets. How we go about it is something we need to think about very carefully – in terms of shaping it,” he said.

Doug Rathbone (Lib Dem), chair of Cumbria Pension Fund’s pensions committee, agreed clarity from the new government will be key for LGPS funds. “What we’re looking for is a cessation of the changes of views and changes of targets and changes of opinion from the various different administrations in the last few years,” he said.

Nick Dixon, head of pensions at Avon Pension Fund, highlighted that his fund is about 10% allocated to infrastructure, roughly split 50:50 between UK and global.

“We’re very enthusiastic about infrastructure,” he said. “We want to raise that percentage, probably towards 15% and what we like about infrastructure is the inflation-plus returns you can get, and its steady income stream.”

Although relatively small, Merton Pension Fund had a broadly similar percentage allocated to infrastructure, around 11.5% or approximately £100m, mostly in global allocations, said Nemashe Sivayogan, head of treasury and pensions. “Why did we invest? We wanted diversification and also exposure to the private market,” she said, with stable returns again a key driver.

Euan Miller, managing director of West Yorkshire Pension Fund and also a member of GLIL’s supervisory board, pointed out that investing in infrastructure can bring benefits beyond simply the returns aspect.

“It’s not just the investments you’ve made and the return,” he said. “You learn a lot from some of these investments and the partnerships you form. Also, the governance rights are a very important feature of GLIL.

“We tend to take stakes in investments that are big enough that you get some governance rights without having the responsibility of managing them and running them,” he said, adding this sort of investment also often brings with it tangible responsible investment benefits.

Definition creep

While emphasising his fund is “absolutely 100%” committed to the asset class, Paul Nevin, head of investment strategy at West Midlands Pension Fund, identified one danger as being definition ‘creep’.

“Even if the fundamental asset is a tangible asset, like Thames Water, it becomes a private equity asset because of all the financial engineering and everything else that goes on around it,” he pointed out.

“So it loses its ‘I’m getting a nice steady [income] stream from supplying water to individual people,’ all those nice characteristics that we want – inflation linkage and everything else – and it becomes a totally different play.”

Another area to be wary of was understanding the true lifespan of the asset, with Mr Nevin citing the example of wind farms, where the assumption tends to be that turbines will last 20-25 years before needing to be replaced. “You’re never going to get it dead on right,” he said. “You never get a 20-year life that is going to last exactly 20. Some are going to last 15 and some 25.

“So, you need to be aware of that variation in lifespan, as that makes a huge difference to your returns,” he pointed out.

Iain Campbell, head of LGPS investment at Hymans Robertson, highlighted that, again, clarity from government is what funds are crying out for. “What I hear clients saying they would need from the government to convince them to invest in the UK, first of all, would be clarity. But clarity around what their actual goals are. What is it they’re trying to achieve?” he said.

This brought the conversation on to what incentives, or even guarantees, the government might be able to offer in return for investing in UK infrastructure.

Mr Campbell raised the possibility of some kind of risk sharing, but added the government might not go for that, “given they’ve made it clear they don’t have any money to backstop these sorts of investments”.

He said another option might be to “just make it a requirement, because then that kind of gets around the fiduciary duty argument”.

Government guarantees

“That’s a very important point,” agreed Mr Meyers. “The guarantee point is an opportunity. If the government is willing to say, ‘we will back, under whatever measure, either the liability or return on the asset’, then I’m pretty sure most funds will not have a problem with that.

“The flip to that is the government can then go, ‘well why not take a little bit more risk; why don’t you take that risk rather than us guaranteeing or backing it?’. That guarantee element, to me, is a practical way forward,” he added.

Ms Sivayogan added: “As a fund, I probably will expect some kind of a guarantee or certainty from the government to invest.”

Luke Webster, chief investment officer at the Greater London Authority argued there’s scope for some really quite radical thinking: “When I’m talking about guarantees, if you go through the tried-and-tested model then there’s no free lunch; you’ll pay for the guarantee, and it will get you back to ‘you might as well have bought gilts’.

“What we’ve got to do is look at situations where it’s in the government’s interest to do something like this because it is a better option financially than just borrowing money on the gilt market and ploughing it into whatever the project may be,” he said.

“I would view a more interesting opportunity being the government guaranteeing the LGPS funds themselves to take this risk rather than guaranteeing the projects on a commercial basis and having to wade through all the state aid. I think that’s an option,” Mr Webster added.

Clarity and certainty

What were the wider problems or barriers here, asked Mr George, for example the planning system or a lack of connectivity?

Both were key blocks, agreed Mr Frith, with the planning system in particular now “completely crazy”.

The ongoing uncertainty over what the LGPS is going to look in the future was a further potential barrier, highlighted Mr Miller. “Structural change in the LGPS hanging over everybody’s heads is a big barrier to people doing good investments. So minimising this sort of thing is key,” he said, with skills shortages, especially in construction, a further barrier to investment.

As the discussion drew to a conclusion, Mr George asked panellists for any concluding thoughts or reflections.

“I think we can see there is a benefit in investing in UK infrastructure/social-related projects, and there are opportunities,” said Ms Sivayogan. But the key remained getting clarity from the government. “I want clarity and certainty on the return, that I’ll be able to pay the pension,” she emphasised.

“I think [we have] a strong contrast to around a year ago when the last government first raised this idea of investing in what was ‘levelling up’ at the time,” said Mr Campbell. “The feedback then was ‘no chance’. Whereas now it feels like there’s a huge amount more willingness to participate. So I think government just needs to make sure it does the right things to capitalise on that and make it work for the LGPS. I do think there is a lot of money that could be accessed there.”

Mr Dixon added: “I think we’re going to best achieve multiple local benefits by taking a national approach. This is a national problem, and we need national, scaled expertise.”

Mr Meyers highlighted “just one word: collaboration”. He added: “When we look at infrastructure as an asset class and we look at where the government’s going, whether it’s pools, whether it’s the funds, whether it’s the developers, whoever we’re working with, I think collaboration becomes vital and crucial in delivering this.”

Mr Webster told the panel: “It’s not the government that has to come up with all the answers here; that’s clearly not going to be the best way to do it. There’s so much to do, and this is so complicated.

“If we want the step-change that is even consistent with achieving net zero 2050, never mind 2030, the government has got to really focus its energies on the very difficult problem of removing the blocks and then let the sectors that are investing, asset allocators, whether they’re private or public, work out the project finance stuff,” he added.

Mr Nevin agreed: “It is about us, somehow, involving the government but [it] not necessarily trying to impose or force people to do things. Really working hard on creating that right environment for really attractive investment projects – not necessarily with guarantees, but creating that stability.”

The final word was then left to GLIL’s Mr Frith. “I’m energised by the enthusiasm for the different opportunities that exist in the UK that I’ve heard around this table and, more broadly, around the country,” he said.

For him, “the government’s pushing on an open door; it doesn’t need to have a big stick to mandate people to invest in UK infrastructure. So I think the ‘ask’ of government is to fulfil the role of facilitator, to look at the impediments to further investment in UK infrastructure and to work with us to remove them,” he concluded.

Policy certainty needed for infrastructure investment

The government must remove hurdles and deliver a greater number of investable projects, writes Ted Frith, managing director of GLIL Infrastructure LLP.

Ted Frith

What struck me most about the roundtable discussion was the energy, enthusiasm and positivity in the room.

It’s clear that, under the right circumstances, there is a strong appetite to invest more into UK infrastructure. There was a consensus for a top-down, national approach to infrastructure investment but that we also cannot ignore the demand for local infrastructure funding or the significant benefits it brings to communities across the UK.

We can do both. Local and national investment programmes can co-exist and complement each other to deliver meaningful, long-term improvements.

One thing is clear though – policy certainty and confidence in the economic regulation of infrastructure assets is a necessity. This is how we give long-term investors, particularly public pensions, the confidence to commit the capital required.

The government must deliver on its promises to remove hurdles to investment and ultimately deliver a larger number of investable projects.

There is real creativity, innovation and ambition in the infrastructure sector. The government’s early engagement is welcome, but it should be wrapping its arms around the sector’s forward thinkers and providing the support and partnership opportunities needed to flourish. It’s not just about enabling investment but also facilitating a greater sense of cohesion across the sector.

Collaboration was another key topic discussed. It is essential the appetite to invest in infrastructure is better harnessed, but it would be counterproductive to have Local Government Pension Scheme vehicles competing for the same assets. That would drive up costs and reduce overall efficiency. Cooperation needs to be encouraged, matching the right investors to the right assets and ensuring opportunities are well distributed across the LGPS.

GLIL is an investment vehicle that was set up to do just that. It has a nine-year track record of fostering collaboration between six LGPS funds and the largest defined contribution master trust, Nest. With over £4bn in committed capital, GLIL has proven that the LGPS can be a real driving force for infrastructure projects and has capacity to accommodate more long-term investors into its UK focused investment fund.

Unlocking the power of public pensions investment is going to be essential, particularly for infrastructure. With the right policy environment and greater collaboration, the LGPS is ready and willing to fund the public projects needed for the UK to reach its growth potential.