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UK local pensions at risk of infra exclusion, group warns

The potential shift to define local authority pension funds as retail investors by upcoming legislation is ‘counterintuitive’, according to the UK’s pension fund association.

European legislation set to be implemented in the UK could exclude local pension funds from investing in infrastructure, the UK’s Pensions and Lifetime Savings Association has warned.

Responding to a consultation by the Financial Conduct Authority, the group – formerly known as the National Association of Pension Funds – said the Markets in Financial Instruments Directive II (MiFID II) move to classify local authority pension funds as retail investors will prevent the growth of a pool of funds that have collectively invested around £2.7 billion in infrastructure.

MIFID II is European legislation designed to further regulate markets and investments in response to the financial crisis. Despite the UK’s decision to leave the EU, MiFID II is still being implemented by the FCA as part of firms’ obligation to continue to abide by UK laws derived from the EU.

Many asset managers exclude retail investors from investing in funds and while MiFID II allows for local authority pension funds to opt up to professional client status, they would have to overcome a series of difficult tests. The PLSA says this does not distinguish between the investment activity of local authorities and local authority pension funds.

“Reclassifying local authority pension funds as retail investors will prevent them from investing in certain asset classes such as infrastructure,” said Graham Vidler, director of external affairs at the PLSA. “With Local Government Pension Scheme funds investing billions in infrastructure right now, and at a time when the government is calling for greater infrastructure investment by pension funds, these proposals are counterintuitive.

“We urge the FCA to distinguish between the investment activity of local authorities and local authority pension funds, so the latter may retain its professional client status to continue its effective investment strategies.”

The FCA said in its consultation that it believes the new MiFID II rules “will reinforce and strengthen the retail and wholesale conduct work we have been doing in the UK”.