Local pension power

Necessity is the mother of invention, or so the saying goes, and there’s nothing like a long-running financial crisis, combined with the obligatory public spending cuts it provokes, to spur innovation in the infrastructure sector.

The latest signs of invention come in the form of an auspicious pairing between two local UK pension funds – the Greater Manchester and Lancashire pension funds – which teamed up recently to invest in a £300 million (€367 million; $465 million) regeneration fund for the north-west of England.

The two northern English pension funds are thought to have committed more than £50 million to the 10-year fund, which aims to spur sustainable urban infrastructure development in the north-west of England. The fund, known as Evergreen, will lend to developers and projects, recycling proceeds from the loans to keep it going.

So far so commonplace, you might say, but Evergreen is not your conventional fund. Run by a group of northern English councils, property advisor Richard Ellis and the Greater Manchester Pension Fund, Evergreen was the result of a collaborative effort between local authorities and businesses to make sure that vital regional projects would still get funded in the face of increasing public spending cuts.

The consortium then successfully lobbied the European Investment Bank and the European Commission to use £20 million of European Union money for the fund, which in turn unlocked a further £40 million in public contributions, as well as money from the two regional pensions. Evergreen hopes to eventually raise up to £300 million.

Considering that local UK pensions hold some £97 billion of assets, there is “enormous potential to invest in infrastructure”, to quote the New Local Government Network, a think tank which is urging regional pensions to help plug the UK’s infrastructure gap.

It’s easy to see the appeal of these innovative structures in an age of fiscal rectitude and punishing public spending cuts. Take the highly controversial scrapping of the £55 billion Building Schools for the Future (BSF) programme – procured partly with the help of the private sector – by the UK’s new coalition government. BSF aimed to refurbish and modernise every secondary school in England by 2023, but the recent cancellation spelled the end for more than 700 school projects that had yet to launch. Perhaps some of those projects could now be re-started at a local level, relying partly on funding from initiatives such as Evergreen.

Of course, for pensions to invest in these initiatives, they will have to be profitable. Evergreen says it is targeting projects that will foment economic growth in the north-west of England, so they are likely to provide good returns. Local projects of dubious political origin, however, will not.

Still, with only 0.7 percent of total UK pension fund assets invested in infrastructure, there is ample space for pensions to commit more money to the asset class. And it would be foolish to ignore the synergies that can be derived from local-level initiatives. After all, we are talking about local pensions investing in the regions from which they originate and of which, presumably, they have a clear understanding.

As the New Local Government Network think tank pointed out in a recent report, there is currently no mechanism for UK local government pension funds to invest directly in pooled infrastructure provided by local authorities.

But initiatives like Evergreen certainly seem to indicate that local pensions are not averse to these investments, as long as they can target them through well structured and transparent initiatives.

“This is a great example of the innovation that can be unleashed when councils and business join forces. I want to see more of this,” said Eric Pickles, secretary of state for communities and local government, at the time of Evergreen’s launch.

It’s hard to disagree with him.