What does it mean to invest locally?
As government pressure mounts to channel pension assets into domestic priorities, LGPS stakeholders are being urged to put capital to work in their own backyards. But with unclear definitions, new reporting requirements and competing stakeholder expectations, how might local investment look in practice?
Participants: Tony English (Mercer), Mike Hardwick (LGPS Central), Jeff Houston (Independent Adviser), Nadeem Hussain (LGPS Central), David Moreton (Barnett Waddingham), Tim Mpofu (London CIV), Anthony Parnell (Carmarthenshire), Chris Rule (LPPI), Matthew Trebilcock (Gloucestershire), Peter Wallach (Merseyside), James Zealander (Waystone)
The UK government has issued a clear signal to the LGPS: put more assets to work closer to home. The latest Fit for the Future consultation urges funds to increase their commitments to local investment with set targets and reporting requirements.
What might seem like a simple addition to LGPS stakeholders’ duties is rather dramatic: the LGPS’s investment strategies have long been guided by risk and return above all else. So, what does local investment look like in practice?
At the recent LGPS Pooling Symposium, hosted by DG Publishing, senior industry stakeholders gathered at a roundtable to discuss just that. While their perspectives and interpretations differed, they each recognised the challenges – and the opportunities – of embedding local investment more deeply into LGPS portfolios.
Defining our terms
One of the first hurdles is definitional. Under the previous government, “local” investment in the LGPS context typically meant UK-wide allocations, with some stakeholders floating the idea of mandated levels of domestic assets owned by the scheme.
Today, however, the emphasis appears to be shifting away from mandates and towards truly local investment opportunities – those that are local to a specific fund or pool, and even are aligned with the economic development plans of the relevant administering authority.
“This is about UK growth and, specifically, ensuring that growth is spread across the UK rather than being concentrated in the South-East,” said Tony English, Head of LGPS Investment at Mercer.
Tim Mpofu, Head of Partner Fund Solutions at London CIV, added: “The previous government’s consultation was very prescriptive about what local means and how much should be allocated to it. This consultation is a bit more open-ended, and I think that’s a good opportunity. It allows partner funds and pools to come together and identify investment propositions.”
Mpofu said London CIV considers local to mean “in the London area”. However, this brings challenges with the many stakeholders that reside in a relatively small geographic region.
“We’re trying to find out what that will look like because we’ll have three key stakeholders – the pool, the funds and mayoral authorities – all with different objectives, trying to find investable opportunities,” he said.
“A lot of that will have to start with the definition from the partner funds about what local looks like and what they want from the pool, so the pool can try to put that into place.”
With 86 LGPS pension funds spread across England and Wales, each investable opportunity should fall within the reach of at least one. David Moreton, Head of LGPS Investment at Barnett Waddingham, said: “If an opportunity makes economic sense and is investable, then at some point it will be local to some part of the LGPS.”
The push for local investment has come alongside the government’s broader UK growth agenda. When it comes to defining growth, Nadeem Hussain, Head of Private Markets at LGPS Central, focused on the concept of additionality – change or improvements that would not have occurred had the investment not been made. “I’d say it is about adding something new or improving an existing asset,” he said.
Evidently, local impact itself can be a nebulous concept. However, then comes the question of what allocating a portion of the LGPS’s assets to local investments may mean for risk and return.
“If we’re considering impact, start in our own backyard. We’re willing to forgo a small amount of return for the community benefit,” said Anthony Parnell, Treasury and Pension Investments Manager at Carmarthenshire County Council.
Matthew Trebilcock, Head of Pensions at Gloucestershire Pension Fund, had a slightly different take. “For me, the key issue is the risk profile rather than the potential return. Local investments can lead to a higher concentration of risk, depending on the geography or sector. I’ve never subscribed to the idea that localism means sacrificing returns, but it may involve accepting a different risk dynamic.”
Setting a local investment target
As funds begin to grapple with the idea of setting targets for local investment, a fundamental question arises: should targets be based on what’s available, or should they guide what to look for?
“The consultation asks pools to set their approach to local investment and set their target, and I think the approach may drive the target,” said Jeff Houston, independent adviser.
“For example, if the approach is to invest very locally, that might drive a target of 1%, as that’s the level of available investable opportunities. Alternatively, it might mean setting a target of 10% with a list of preferences – from very local to other UK regions or broader impact assets. Do we start with the approach or do we start with the target?”
This consideration of what is truly feasible is critical, especially as investment opportunities vary across geographies. For instance, a fund may have limited quality opportunities in its area or those opportunities may not be affordable. “That’s what worries me about setting a target of, say, 5% local investment,” Houston added.
Of course, investment opportunities are inherently tied to asset classes – which will also help shape local investment targets. Hussain, of LGPS Central, said flexibility was key in this regard. “As a pool, our plan is not to be specific to each asset class – so not 5% local investment in each private market asset class, for example. The market for each asset class might be more or less attractive, so having a target for each might push you towards the wrong opportunity. We’re looking at a target that applies across asset classes instead.”
Peter Wallach, Director of Pensions at Merseyside Pension Fund, shared how his team approaches local investment targets, albeit with a debt-focused framework that was set well before the current consultation.
“We haven’t decided about how to distribute our target across asset classes,” he said.
“We set up the Merseyside Catalyst Fund back in 2016 to invest a notional 1% in the local area, and we’ve chosen to invest that through debt as much as possible – partly from a risk perspective and partly due to our need for income.
“Going forward I think the pool will need a pot, which could involve allocations to venture, to credit, to property and infrastructure, and so a proportion of our local investment allocation could be to that. We still have a preference for debt, but that’s not to say we can’t do anything else. To do that on a non-segregated basis may be quite difficult, so there’ll need to be some compromise and discussions across the pool.”
Measurement and impact
Once an approach to, and target for, local investment have been set, there comes the question of how to measure the successes of these initiatives. The consultation proposes that annual reports include information about the impact of a fund’s local investments.
It is this notion of impact – and how to measure it – that is proving to be one of the most complex challenges.
One reason for this complexity is the non-prescriptive nature of the consultation. Though the government’s exact requirements will become clearer in its consultation response, it has shied away from prescribing set metrics for funds to follow.
Chris Rule, Chief Executive Officer of LPP and LPPI, welcomed this approach, saying it could allow space for metrics to evolve over time.
“Measurement is the big challenge, and I think that’s why the consultation was worded the way it was,” he said.
“It gives people the ability to take a more qualitative approach and develop metrics over time rather than using what we have today: jobs created, energy saved, carbon emissions reduced. They are all quite basic, and the hope is that metrics will improve over the years.”
English, of Mercer, agreed, saying the government’s flexibility could give the market room to mature at its own pace.
“I’m hoping the government won’t be too prescriptive about reporting and gives the market time to develop. Let’s get people publishing targets and I think best practice will evolve,” he said.
Not everyone agreed that open-endedness is the right answer. Mike Hardwick, Investment Director for Property at LGPS Central, argued that some standardisation is necessary.
“I understand the desire for reporting not to be prescriptive, but we do need some degree of consistency so that we’re all reporting on the same kind of things. Those metrics will change and improve over time, but we need some common points,” Hardwick said.
Moreton, of Barnett Waddingham, echoed this need for a foundational framework: “We’re still very much at stage one, trying to figure out what this could look like. If you’ve got an example of someone doing it that you can take on, it may then grow and develop in its own way – but there’s a starting point in terms of measuring impact.”
Implementation
When it comes to delivering on local investment ambitions, turning policy into portfolios is no small feat. Local, after all, is not an asset class, which raises questions about how funds and pools will implement local investment within their broader strategies.
Third-party providers stand ready to help their clients as they navigate the implementation question. James Zealander, Senior Relationship Manager at Waystone, said: “In terms of constructing a fund, we take on board what the stakeholders have to say, and we can build any kind of vehicle they need, being the external operator.”
As implementation falls to pools, the level of prescriptiveness from each fund will be critical.
Trebilcock, of Gloucestershire Country Council cautioned against overly rigid demands: “Are we expected to be prescriptive about the types of assets we invest in – such as social and affordable housing or renewable energy – or is the goal simply to encourage local investment more broadly? While the aspiration is commendable, if suitable opportunities aren’t available, then implementation should be paused and revisited through dialogue. As a fund, I would not want capital to be committed to substandard investments merely to meet a target.”
This question of investability is tricky in and of itself. Who decides what qualifies as such, and how?
Parnell, of Carmarthenshire County Council, suggested that expertise is essential and LGPS stakeholders may not be well-placed to set rigid risk and return criteria. “It’s more about allocating to the manager and letting them identify the opportunities because they’ve got their feet on the ground – they’re well-versed in this,” he said.
But others stressed the need for structure. “For us, certainly, there will have to be minimum bars [for risk and return] because ultimately you’re going to get every sort of opportunity and you don’t have the time to go through all of it,” said Hussain, of LGPS Central.
Ultimately, implementation will rely on greater clarity of roles and responsibilities. The mechanics may vary from fund to fund and pool to pool, but the principle is clear: success depends on finding the right vehicles and partners.
Managing stakeholders’ expectations
As the LGPS’s investment strategies become at least partly focused on impact, stakeholders may receive a deluge of opportunities that aren’t a good fit for their goals. With the scheme’s primary purpose rooted in delivering members’ benefits, managing those external expectations will be critical.
Rule, of LPP and LPPI, emphasised that success lies in “old-fashioned relationship building. Spending time with stakeholders, speaking regularly. It’s about knowing how to connect and with whom to connect.”
LGPS Central’s Hardwick added that it was important to ensure stakeholders understand the LGPS is not a philanthropic organisation.
“It’s a case of educating every party about what drives us. We want to hear all these opportunities and sift through them ourselves,” he said.
“We’re not here as grant-makers. It’s important we stay clear on our role, and while we’re keen to engage, investability remains our starting point.”
Trebilcock, of Gloucestershire Pension Fund, agreed but said this was not so different from his current position. “I’ve been receiving approaches on investment proposals for years, often pitched as the next big opportunity, and I’ve had to disappoint the vast majority of them on investment grounds. I expect this process will become more formalised going forward, but the underlying challenge of filtering viable investments will remain.” he said.
The notion of acting as investor not benefactor echoed throughout the discussion. While some tough conversations may need to be had, greater connectivity among stakeholders may prove to be positive.
“We have central and local governments that are working on national and regional growth objectives, and then we have pension funds – their point of view is completely disconnected from the conversation,” Rule said.
“The government’s goal seems to be bringing those conversations together, thinking about the various capital sources – where could bank funding go in, where could pension funds go in – and putting those capital sources together you may get an investable proposition. I don’t know how realistic that is, but it seems to be the hypothesis.”
The conversation around local investment is still in its formative stages. What’s clear is that this shift is more than a change in allocation; it requires a rethinking of how LGPS funds define and source investment opportunities.
While definitions and metrics may evolve over time, the underlying challenge remains the same: ensuring local investments are not only impactful, but also economically sound and aligned with the scheme’s core purpose.
This roundtable discussion took place on the 8th May, before the Pension Schemes Bill was published. A follow-up roundtable will take place at the LAPF Strategic Investment Forum on 30th July which will assess the impact of the Pension Schemes Bill on the LGPS approach to local investment.
