As featured in Private Markets Profile
The Pensions Scheme Act 2026 is now law and Fit for the Future regulations make local investment a core responsibility – one the consolidated pools have the scale to act on. Analysis from the Impact Investing Institute found that a 5% allocation of LGPS capital could mobilise £20bn for previously untapped growth areas, so the opportunity is significant. For many funds the question is no longer why, but how to do it while balancing scale, diversification and fiduciary duty.
At Better Society Capital, we have made place-based impact investments for over a decade, committing £1bn to UK impact funds, with £3.5bn alongside us from other investors. So, we understand some of the concerns that LGPS funds might have about how to realise this opportunity in practice – scale, risk, impact-washing. As a market builder and investor, here are the three myths we most want to dispel.
Myth 1: “A big allocation to local investment isn’t realistic for us – not at scale, and not while keeping it meaningful to our area.”
There is no question this is a genuine challenge. Local solutions with maximum connection to communities do not always lend themselves to scale, while national funds raise questions about how much will actually reach people in the local area or address the issues that matter to commissioning authorities. But this challenge can be bridged by bringing together a blend of options across geography, asset class and structures.
We think about local investment across three layers: UK-wide models that target key local issues like affordable housing and health; investment solutions that focus on channelling capital to specific regions, like SME lending via community finance; and specifically targeted local vehicles like those in Bristol, Cambridge and Liverpool. These solutions also span asset classes, enabling fit with existing portfolio strategy, and co-investment is a further tool that gives funds the ability to shape specific mandates around local priorities.
By bringing together a mix of these solutions, it is possible to achieve scale through existing impact products, alongside reach into the places and issues that matter to local people and Mayoral Strategic Authorities. Our own portfolio incorporates multi-£100m funds addressing those key issues that need investment at scale – reaching tens of thousands of people in housing need and millions affected by issues like financial inclusion – while the majority of our lending portfolio extends well beyond London, with over half reaching into the most deprived areas of the country.
The crucial lens on this is impact, which allows us to set clear goals for who and where our capital reaches, and have transparency around what is happening on the ground – whether the fund itself is national or local. For example, we have been tracking how impact housing funds with combined gross assets of £1.56bn actually meet housing need through the Housing Impact Benchmark and we also look at where our own capital reaches at a postcode level. We think transparency around impact is essential so that schemes can evidence what their capital does locally.
Myth 2: “Targeted impact for the most underserved people in our area would mean taking on too much risk.”
Given the importance of fiduciary duty, there could be an understandable concern that targeting investments to underserved people or markets means more risk. The reality is more nuanced – and you can actually turn this around.
Where there is high and structural need, and where addressing that need is a priority, we think well-designed investments can deliver durable demand, government-backed revenues and low correlation to mainstream markets. So the impact and financial case can actually reinforce each other.
Social and affordable housing is a good example of this, and we’re seeing a growing number of LGPS funds already moving here, with substantial inflows into UK impact affordable housing funds in the past two years. Local authorities have a legal duty to house people experiencing homelessness or with complex needs, so demand does not move with the economic cycle. Knight Frank's 2024 Affordable Housing Report found 47% of social renters stay over ten years, versus 10% of private renters – meaning lower voids and more predictable income.
Of course these investments are not risk-free. Counterparty risk is a real consideration and policy can shift. That points to the importance of fund manager selection. For example, specialist housing requires a deep understanding of individual needs, provider and property management, but a high-quality manager understands these risks, structures for them and navigates them through the investment lifecycle.
Social outcomes partnerships or ‘SOPs’ offer a growing example. Homelessness, inadequate childcare and criminal justice are among government’s most expensive challenges, and independent research has shown that SOPs can deliver £9 of public value for each £1 from government. In turn, this unlocks an opportunity where investors provide capital to support those facing the most complex disadvantage, government pays for outcomes, and the impact and financial returns are linked in a way that is not correlated to mainstream markets. And it’s poised for growth: the government committed last year to the £500m Better Futures Fund, to be matched by local commissioners, which will create local investment opportunities at greater scale.
Myth 3: “It’s too difficult to tell which fund managers are genuinely committed to creating local impact.”
So, having highlighted the importance of impact in local targeting, how do you actually choose a great impact manager and hold them to account? Great impact fund managers don’t just report on impact but integrate it across the investment lifecycle, helping them source businesses, assess investments and manage financial and impact performance together.
The challenge is knowing what good looks like – and we think two things can help. First, a growing body of good practice and common language. The Impact Frontiers’ Five Dimensions of Impact is a good starting point and the 9 Principles from the Operating Principles for Impact Management test whether impact is embedded across the lifecycle. BSC's own disclosure statement shows this in practice – specific impact theses, measurable KPIs, annual impact conversations with managers, and honest reporting on what hasn't worked.
Second, peer learning matters. LGPS funds that are further along on the journey have meaningful experience. For example, Greater Manchester Pension Fund has been sharing its own place-based investments and impact, using The Good Economy’s place-based impact investing (PBII) pillars. And, while we are not an LGPS ourselves, we do have some of our own experience to draw on from our investments over the past decade. Beyond the frameworks, we’d highlight more things to look for in a great manager:
- Clarity on who they are serving and why – with a willingness to commit to those people upfront.
- A deep understanding of how impact and business models are connected in meeting the needs of the people they serve.
- Transparency and accountability around impact – embedded in investment committee decisions, not just disclosed in annual reports.
- A commitment to learning on an ongoing basis – which means being honest about what has worked, and what hasn’t.
We have also built shared tools and standards for the market – for example, affordable housing – to help spread comparability and accountability across the sector.
Conclusion
Local investment is new territory for some LGPS funds and already underway for others – but for all, it carries challenges. What our experience suggests is that impact can also help identify where unmet need becomes investment opportunity at a local level. And when strategies are designed with intent – the right mix of scale and local targeting – these strategies can be ambitious in reach, meaningful to members, and built to manage the risks that matter. The regulatory direction is set; the question now is whether funds will seize the opportunity with the ambition it deserves.