About the Pensions Investment Review
In September, the Chancellor launched a landmark pensions review to boost investment, increase saver returns and tackle waste in the pensions system, led by the Minister for Pensions. The review will focus on defined contribution workplace schemes and the Local Government Pension Scheme (LGPS) and includes a call for evidence from relevant stakeholders.
BSC’s response below focuses on section 3 on the broader investment environment in the UK for LGPS funds. It supports the position of key organisations working to strengthen the role LGPS funds play in creating local and regional growth, such as the Impacting Investing Institute (III).
The questions responded to are as follows:
Section 3: Investing in the UK
- Is there a case for establishing additional incentives or requirements aimed at raising the portfolio allocations of DC and LGPS funds to UK assets or particular UK asset classes, taking into account the priorities of the review to improve saver outcomes and boost UK growth?
- In addition, for the LGPS, there are options to support and incentivise investment in local communities contributing to local and regional growth. What are the options for those incentives and requirements and what are their relative merits and predicted effectiveness?
Our response
According to the III, the UK impact investing market has grown to £76.8bn in assets under management (AUM), a £19.3bn increase from the inaugural market sizing in 2020 and representing a 10.1% compound annual growth rate [1]. We were pleased to see the Secretary of State for Culture, Media and Sport offer her support for impact investing to “harness the innovation and entrepreneurship...in all parts of our country and direct it towards a common good” [2]. A key tenet of this approach is “place-based impact investment” (PBII) which intends to mobilise institutional investors, such as pension funds, in a specific place to address localised needs. This delivers appropriate risk-adjusted financial returns and positive local impact, particularly in relatively deprived areas.
Work undertaken by The Good Economy highlights sectors such as housing, clean energy, SME finance and health as the main recipients of PBII through specialist fund managers, due to the associated long-term returns with lower risk and volatility in comparison to other asset classes. Key institutional investors, such as Schroders [3] and Legal & General [4], recognise the alignment between pension fund capital and PBII, where financial returns and positive environmental and societal outcomes are not mutually exclusive.
LGPS is one of the largest pools of institutional capital with connections to communities across the UK, with its decentralised geography, local investment decision-making powers and a legacy of local investing. As an example of how this investment is being directed towards tackling social issues, there is growing interest and active investing from LGPS in social and affordable housing, driving the growth in this market from a standing start in 2011 (with BSC instrumental in seeding the market) to £5 bn in 2023. 64% of LGPS funds intend to increase commitments to local investments, signalling a significant shift in the sector [5].
Government has a vital role to play in ensuring an enabling policy environment which encourages more LGPS funds to tackle social challenges through PBII. This includes empowering pension schemes to allocate in line with their members’ interests, including their communities and environment, by:
1) Building capacity for pension funds to make place-based impact investments (PBII)
Following the previous administration’s recommendation in the Levelling Up White Paper on how LGPS funds should increase their allocations to local projects, this government should support the building of pension funds’ capacity to invest for impact. 2.4% of the total value of LGPS AUM is allocated to PBII of which 1% (equivalent to £3.2bn) is invested in the UK, however there is potential for this to be much greater [6]. Government should examine international examples for best practice, such as Australia’s superannuation fund “REST” and its commitment to achieving a one per cent impact allocation by 2026.
BSC plays a role in supporting LGPS and others to understand how to allocate, as well as seeding and scaling impact investments with our own investment capital which enable pension funds to identify investments delivering on their PBII goals while living up to their fiduciary responsibilities. Examples of these include seeding and scaling social property funds, scaling alternative community-based lenders (CDFIs) and supporting community-owned renewable energy.
Central and local government can also work with the private sector to ensure there are suitable investment opportunities and to build capacity across sectors to deliver these projects. This would support the creation of strong returns and local multiplier effects to improve outcomes, and increased financial stability for pension funds’ local authority members.
2) Clarifying the fiduciary position
In the first instance, LGPS funds have a responsibility (fiduciary duty) to act in the best interests of their scheme members and employers. As outlined, PBII can support the creation of strong returns and local multiplier effects to improve member outcomes. Stronger local economies would also mean increased financial stability for members. To support and incentivise LGPS funds to invest in local communities with the aim of contributing to local and regional growth, policy clarity is required: LGPS funds need explicit reassurance that they can invest for impact in the context of acting in the best interests of members.
3) Helping create incentives
Government can provide first loss or guaranteed minimum investment returns to encourage the crowding in of pension fund capital, e.g. through blended finance or outcomes-based approaches. BSC has worked to build blended capital structures and support the provision of blended finance products, including supporting the creation of Access and committing over £148mn in 33 blended finance funds, making over £270mn available to social purpose organisations including through place-based programmes such as Bristol One City Funds and Local Access.
There is an opportunity to substantially scale this up to meet the range of local needs, repurposing existing grant spend which would then be leveraged further by pension fund and other institutional capital. Suitably scalable vehicles will be required to enable pension funds and other institutional investors to access these investments. Examples of this developed by BSC include the Community Investment Enterprise Fund and Schroders BSC Impact Trust.
BSC and partners are keen to work in partnership with government to support this agenda, through sharing our expertise on impact-seeking capital, our strong track records in designing products and best practice on how to structure incentives across a range of financial products to crowd in private investment.