Minister calls on LGPS pools to channel more investment into housing
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Local government minister Rishi Sunak has encouraged Local Government Pension Scheme (LGPS) pools to increase their investment in housing.
Speaking at the Pensions and Lifetime Savings Association (PLSA) local government conference, Sunak singled out the private rented sector as an opportunity to provide long-term returns whilst helping solve the housing crisis.
He pointed to the example of Greater Manchester Pension Fund’s Matrix Homes partnership with Manchester City Council and Homes England, which is already investing in the sector.
Sunak said: “Housing in general is a government priority for the country. We all know we need to build more homes. It is widely accepted that our housing market isn’t working as well as we would like it to.”
He added that there is a need to “deploy” more capital to build homes in the private rented sector.
“If that works for all of you, great,” said Sunak. “It supports society’s needs but, first and foremost, it is about what works for you, and what works for your funds, and what is going to deliver for the people you have to deliver for.”
Sunak said that he would not set central targets for the sums that pools should be looking to invest.
He also reiterated that it was not for government to dictate the amount of overall infrastructure investment pools should make, whilst urging them to do more in this asset class.
“The LGPS is one of largest pension schemes, not just in Europe but in the world, but does not yet punch its weight in this area,” he said.
Although pools have set targets for infrastructure investment of 5–10% of assets in the long term, this is still below some international comparators, the minister said.
“Nevertheless, I don’t want to set arbitrary targets for investment. Investment strategies should always be set to deliver the income to pay pensions.
“The LGPS primarily exists for this purpose and we should never lose sight of that. But it can also look to maximise the wider benefit of its investments.”
Speaking after the minister, Roger Phillips, chair of the LGPS Advisory Board, warned that there were limits to the volume of housing investment that LGPS would be able to provide.
“We are not housing associations. A housing association has a very clear mandate. It invests in housing, it gets income and it reinvests it. We are not the same,” he said.
“We need to be clear about what those packages are. Particularly on infrastructure as well. Some time ago there was this idea that on 1 April the pools would start and there would be infrastructure schemes shouting at the door. I think history will recall it will be a small burn.”
Phillips said that placing money in housing and infrastructure should only be undertaken if funds and pools understand it properly and it is investment they “genuinely want to do”.
He said: “We are one of the largest pension schemes in the UK and some of the lowest paid members of the public sector. They deserve a decent retirement and it is our responsibility. And sometimes we forget in the hurly burly of the investment world that that is what we are there for.”
During his speech, Sunak said that his department was looking to improve the quality of data held by LGPS funds.
He said: “I recognise that the complexity of the scheme including the large number of employers and the introduction of the career average scheme have greatly increased the challenge for funds in this area.
“The Government Actuary’s Department was concerned with the quality of data they were provided with by funds in their 2016 valuation – and poor data means less ability to manage risk and may mean that employers pay out more funds to protect themselves against a worst case scenario.”
The minister also announced that his department will consult later in the year about improvements to arrangements for the transfer of pension responsibilities when councils outsource services to third party providers.
He said: “I want to improve the way mergers and transfers are handled, and I also intend to reform the operation of the fair deal policy so it works in a fairer more cost effective and administratively efficient manner.”
In a recent Room151 interview, Chris Rule, chief investment officer of the Local Pensions Partnership, spoke about an increased activity in UK housing investment within the pool’s real estate portfolio.
He said: “I think the short hand is, we are going to have to build more in this country if we are going to have enough houses. For us, as an institutional investor, we want to invest in diversified portfolios and while housing isn’t without its challenges, it’s attractive for many reasons.”
Notably, the long-term income-generating and liability-matching characteristics of housing investments are seen as attractive for pensions and annuity players.
