LGPS and the infrastructure funding gap

Ted Frith argues that the Local Government Pension Scheme is on the “cusp” of a seachange in infrastructure investment

Infrastructure works on a different time frame to much of the rest of the economy. Where others are planning for the next quarter or financial year, our industry is operating in decades and planning for generations ahead.

The current pandemic has provided sobering perspective as the country battles the virus and many of us pick up the rhythm of daily life under lockdown. As I sat down to pen this piece, the isolation and grounding has opened up an opportunity to really take stock and consider the progress we’ve seen since we launched GLIL Infrastructure in 2015.

Scale

Our journey started before George Osborne, the then chancellor, formally implemented pooling and encouraged LGPS to bring their assets together. Now, after considerable efforts, those pools from across the country are well established. 

Pooling is about scale and leveraging the benefits that such scale brings. Potential benefits are beginning to be realised but there is much still to be done. Essentially, it has given LGPS the chance to do things differently. Not least, the platform to take their capital beyond more traditional asset classes and make considerable direct investment into alternative asset classes, including infrastructure.

Of course, it has been hard. If it wasn’t hard then I feel more of the schemes and pools would have been following the path that GLIL has taken as we share so many objectives. Collaboration between pension funds requires patience, discipline, a drive to work together, and a common goal. Furthermore, direct investment demands specialist expertise and experience and a capacity for far greater involvement in investment decisions and asset management. 

Despite these hurdles, I believe that we are on the cusp of a sea change in infrastructure investment and LGPS will be at the heart of it.

The funding gap

It is incredible to recall that infrastructure was the buzzword heading into the Budget. That period in late February and early March, only a few months ago, feels like a distant memory before the wall-to-wall Covid-19 coverage. The government presented infrastructure as a key pillar of its economic strategy and bid to “level-up” the regions.

While the world is a starkly different place now and government focus rightly lies in healthcare and damage control, the role that infrastructure can have in supporting economic growth stands firm. So does the enormous sum of capital needed to deliver those projects, and the gap between the ambitions and limited spending power of the chancellor, Rishi Sunak.

Our own research, conducted with YouGov, has gauged public appetite for infrastructure investment. Even amidst the disruption of the pandemic, we found that there is widespread support for it, particularly in areas like renewable energy, which a considerable majority of the public (62%) believe is “very important”. While regional preferences varied, there was also notable support for utilities, rail and roads projects across the country. 

If anything, with government priorities diverted, there is as strong a case as ever for Number 11 Downing Street to encourage private sector and local government pension schemes to step up and help bridge that infrastructure funding gap as part of the nation’s recovery and, at the same time, respond to that public support.

The opportunity

The infrastructure investor community has long been dominated by large corporate asset managers. Yet, any study of the ownership structures for UK infrastructure will show that a quiet revolution has taken place from renewable energy, energy from waste and regulated utilities to ports and rolling stock.

There has been a new wave of owners bringing their capital to the market, eg., pension funds, which now influence some of the country’s most significant infrastructure companies and assets. There’s no reason why LGPS shouldn’t match their commercial counterparts. 

The benefit is mutual.

For infrastructure, the LGPS makes an ideal owner in many ways given their long-term outlook, modest target returns, inflation-linked liabilities and desire to make a targeted contribution to economic growth. And, crucially, they offer an even deeper source of capital.

For pension funds, infrastructure provides predictable, identifiable cashflows and early income generation to long duration, durable, physical assets with low risk of obsolescence, along with high barriers to entry and a material yield component of the return. 

Quite simply, they are a great fit.

Thankfully, recognition for the role that LGPS can play in supporting infrastructure is building. Above capital investment, LGPS has been eager to actively engage with management teams and encourage responsible stewardship of their assets. And that involvement is more important than ever as governance, risk and control hit the top of the corporate agenda, a trend the market has seen well before the Covid-19 pandemic.

LGPS is also looking to gain influence on their investments and drive their ESG strategies. With pooling, the opportunity to make direct investments provides the proximity required to have that impact and retain a strong voice in the board room. No doubt, this will be beneficial to all those sitting around the table.

The future

Now, as we look forward, the challenge remains clear. The UK has significant infrastructure ambitions and taxpayer funds will only go so far – not least as the Treasury reshapes its Budget to cater for the considerable intensive care it has provided the economy in recent weeks.

I see LGPS having a crucial role to play in plugging that gap. It is now our time to not only be the exemplar long-term custodians of infrastructure assets, but also help drive the sector forward to support the recovery and future growth of the UK economy. I am confident that many like-minded LGPS funds will step up to that challenge.

Ted Frith is chief operating officer at GLIL Infrastructure.

GLIL is an alternative investment fund with more than £1.8bn of committed capital. Established in April 2015 to invest in infrastructure projects and is supported by a number of UK local government Pension Funds, including Northern LGPS, and Local Pensions Partnership. GLIL is regulated by the FCA.