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UK increases local authority infrastructure threshold

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UK – Local authority funds in the UK will soon be able to invest an additional 15% of assets in infrastructure, the government has confirmed.

The Department for Communities and Local Government (DCLG) recently amended the Local Government Pension Schemes (Management and Investment of Funds) Regulations, doubling the exposure schemes are allowed to have to limited partnerships.

The National Association of Pension Funds' head of policy Darren Philp welcomed the changes and said it was positive the government had listened to the industry's concerns.

"Many local authority pension funds have told us they are prevented from making the best decision on investments because of outdated rules that place limits on the amount that can be invested in infrastructure."

By increasing the upper threshold from 15% to 30% of the local authority fund's assets, schemes can now increase allocation to limited partnership fund vehicles.

The changes were signed off by secretary of state for communities and local government Eric Pickles, who had previously predicted that the changes would allow the local government pension sector to "pump a further £22bn (€25bn) directly into job-creating infrastructure projects".

Increasing the threshold of limited partnership investments was only one of the options put out to consultation by DCLG in November.

The department at the time also solicited opinions on introducing a separate infrastructure asset class, capped at 15%.

Philp said the revised threshold had dealt with one existing investment barrier, but a wider number of issues still needed to be addressed.

"The government needs to undertake a comprehensive review of the local authority pension fund investment regulations to ensure funds can act in the best interests of their members and council taxpayers," he said.

His comments echo those of Mike O'Donnell, director of finance for the London Borough of Camden and responsible for the council's £1bn in pension assets.

Discussing the consultation, O'Donnell said the investment restrictions placed on local authority funds should be "removed entirely".

"They are overly prescriptive, and investment risk would be better managed through a more prudential system of diversified asset allocation," he said.

London's local authority funds have also recently been considering the consolidation of assets through the launch of the London Pensions Mutual – a move backed by the chairman of the London Pensions Fund Authority.

Paul Marsh, professor at the London Business School, told the National Association of Pension Funds Investment Conference in Edinburgh that administrative and fund management fees would need to be addressed by pension funds as a way of counteracting the low investment returns he predicted would become commonplace in future.

"It's time we did challenge fees," Marsh said.

"We have already seen collective schemes, like the London local authorities, thinking of merging.

"It's not without its challenges and problems, but it is a potential way administrative costs can be saved."

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