How pension funds can make a real impact

Evita Zanuso looks at the growth of investing in socially beneficial projects

As the number of headlines on impact investing has grown over the years, so to have the number of pension funds investing through dedicated impact funds. In the UK, Local Government Pension Schemes (LGPS) including the Environmental Agency Pension Fund, Greater Manchester, Merseyside, Waltham Forest, and West Yorkshire have all made allocations to impact investments.

Despite this growing trend, many pension fund trustees still consider impact investment esoteric. A 2017 report by Allenbridge revealed 82% of pension fund managers and trustees felt they lack hard data on impact investments and cited this as the overwhelming barrier to entry.

Lessons from overseas pension funds

When searching for hard data, a lot can be gleaned from our international peers. Christian Super, an Australian superannuation fund have been investing in a range of impact investments for more than a decade, and have outperformed their benchmark.

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Closer to home, Dutch mid-sized pension funds are amongst the most active investors allocating to impact. FMO Investment Management, a subsidiary of FMO, have created an emerging market impact product alongside the Dutch Development Financial Institution (DFI) to help facilitate investment for institutions who want to invest alongside the DFI.

UK LGPS and impact investing

Back in the UK, we have the LGPS schemes, for whom impact investment is a lens rather than a separate asset class. In fact, on closer inspection, their impact investments appear to fall into traditional asset classes.

Increasingly, some of these investments appear to offer lowly correlated diversification from a fund’s mainstream investments. Combined with growing calls from the public for investments with positive impact, trustees can rest assured that impact investing won’t necessarily compromise their fiduciary duties.

Types of impact investment funds and the pension funds investing in them

Impact venture capital

Impact Ventures UK is a mission-led, active late-stage venture capital fund investing in companies solving societal problems, including Unforgettable, a business that provides products to help those living with dementia.

LGPS investment: Waltham Forest Pension Fund.

Charity bonds

Many charities in the UK operate as businesses, generating revenue from their activities. The bond market for small to medium-sized charities has grown from £24 million in 2014 to £230 million. Golden Lane Housing, set up by Mecap to deliver homes for people with learning disabilities, has raised two retail charity bonds, and Charities Aid Foundation also raised a £20 million bond to further its work, which attracted investment from West Yorkshire Pensions Fund.

LGPS investment: West Yorkshire Pension Fund.

Outcomes or payment-by-results contracts, also known as social impact bonds

With payment-by-results contracts, investors are paid only if pre-defined social outcomes are achieved. This innovative method is being picked up by the UK government, which will increasingly look to structure contracts on this basis to drive better results within key policy areas.

Bridges Fund Management and Big Issue Invest both manage outcomes-financed funds. Areas of intended impact are in youth employment, children’s services, homelessness and health and social care.

LGPS investment: Greater Manchester Pension Fund and Merseyside Pension Fund.

What’s on the horizon?

The availability of affordable housing is a growing issue in the UK, felt most acutely by vulnerable people and those on low incomes. A lack of socially rented homes has increased dependence on the private rented sector. With councils spending over £1 billion on temporary accommodation and an estimated 4 million people in housing need, there is both a social and financial imperative to tackle this problem.

We believe there is a gap in the provision of equity-like capital for affordable housing which can be made available through social property funds. Whilst these opportunities are underpinned by a social need, they also offer institutional investors attractive financial characteristics: asset- backed long-term, inflation linked revenue streams; and government-backed covenants.

Affordable housing also offers diversification by way of differentiated asset level characteristics such as low correlation with economic cycles, low-risk counterparties in the form of housing associations, and an opportunity to invest in new fund managers.

Next steps

Tip 1: Join like-minded pension funds as an affiliate member at Pensions for Purpose.

Tip 2: Find out how other investors have done it, contact Big Society Capital for help.

Tip 3: Learn about impact management and how other asset owners are approaching impact investing at Impact Management Project.

Evita Zanuso is senior director, financial sector and investor engagement, at Big Society Capital.

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