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Impact Investing

IPE special report May 2018

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UK local authority funds need clearing house for social projects

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  • UK local authority funds need clearing house for social projects

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UK - Local authority pension funds in the UK are increasingly keen to invest in alternative social projects, and the creation of a clearing house for such investment would encourage them to do so, a joint report has found.

The report published by the Smith Institute aims to discover how to promote local government pensions investment in local capital projects such as social housing.

Paul Hackett, director of the Smith Institute, said: "This study […] shows that there is growing appetite for 'alternative' social investment."

The challenge now was to scale this interest up, he said.

"A new agency to act as clearing house for these type of investments would help achieve that," Hackett said.

The study was put together by a research consortium of the Smith Institute, the Centre for Local Economic Strategies (CLES), Pensions Investment Research Consultants (PIRC) and the Local Authority Pension Fund Forum (LAPFF).

Local and central government and the pension fund industry should to do more to make this type of investment happen, the report said.

These parties should blend and pool funds, provide better guidance and training for trustees and pension fund officers, reform the rules on the management and investment of funds, and set up a new independent platform, or clearing house, to assess the economic, social and environmental value of projects, it said.

Additionally, the report argued that the local economic development world - including Local Enterprise Partnerships - needed to engage more effectively with local authority pension funds.

The study was based on interviews with more than 100 local authority pension trustees, investment officers, fund managers, councillors, officers and advisers.

It found that nearly all pension funds had reacted to turbulent world markets by increasing exposure to alternatives - private equity and infrastructure.

Trustees were now taking more action to develop new and alternative sources of investment, the report said.

But fiduciary responsibilities and 'finance first' were cited as the main reasons for not developing extensive impact investments for wider economic benefit.

No pension funds said they would be prepared to accept less returns in exchange for achieving social benefits. 

The funds showed significant interest in pooling resources and in mergers, as well as in the issue of the barriers to scaling-up investment.

The main barriers to developing these "impact investments" were managing reputational risks associated with new investments as well as potential conflicts of interest, especially to do with local infrastructure schemes, according to the report.

Funds were also worried that more complex fund portfolios would put extra time pressure on pension panel members.

The main areas for improvement included setting up joint ventures, pooling arrangements, developing framework agreements for procurement and commissioning external managers.

Additionally, funds wished to have a greater understanding of complex alternative investments such as layered property investments, joint ventures, and the use of derivatives and hedge funds to manage exposure to certain investments.

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