Billions in infrastructure investment 'at risk' from local government pension fund changes

BILLIONS of pounds in infrastructure investment could be at risk if proposals to reclassify local authority pension funds goes ahead, experts have warned.

Funds would be reclassified as retail investors under the EU's Markets in Financial Instruments Directive (MiFID) II, a wide-ranging piece of legislation drawn up in the wake of the 2008 financial crisis to improve investor protection.

The Financial Conduct Authority, which is overseeing the implementation of MiFID II in the UK, has proposed an "opt-up" for local authority pension funds to elected professional status if they meet certain criteria.

But the Pensions & Lifetime Savings Association said the change should be rejected because the majority of infrastructure investment firms are structured explicitly to exclude retail investors. As a retail investor, there would be no guarantee that asset managers would be willing to do business with LGPS funds, or would not impose a significant cost for doing so, it added.

As of the end of March 2015, the Local Government Pension Scheme (LGPS) had assets worth £2.17bn and 5.17m members - more than 10 per cent of all adults in the UK.

The PLSA's most recent annual survey shows LGPS members have 1.1 per cent of their assets invested in infrastructure, meaning around £2.7bn would be at risk.

It said that investments by local authorities for pension funds are already subject to high standards under the Management & Investment of Funds Regulations 2016, which include a requirement that funds take "proper advice" when appointing investment managers.

The association also warned that the proposed opt-up process would be time-consuming, while providing no guarantees that future investment strategies will be effectively executed with existing managers or on existing terms.

Graham Vidler of the PLSA said: "We understand the need to ensure those making investment decisions have appropriate knowledge and understanding. However, the FCA needs to consider that local government pension funds have significant levels of investment expertise, a robust track record of effective risk management in investments and considerable experience across a wide range of asset classes, including infrastructure.

"Reclassifying local authority pension funds as retail investors will prevent them from investing in certain asset classes, such as infrastructure. With LGPS 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."