May 30, 2019 (LONDON) – Newly aggregated “pools” of local government pension schemes (LGPS), worth £270 billion ($350 billion) in total, show different approaches to investing in renewable energy infrastructure, with lessons for those still undecided on their approach, according to a report released today by the Institute for Energy Economics and Financial Analysis.
A UK government initiative has aggregated the management of assets of 89 LGPS in England and Wales into eight pools, to help the underlying schemes benefit from economies of scale, for example to negotiate lower management fees, and acquire the skills to execute complex deals, including in infrastructure.
Going forward, the LGPS are supposed to invest via their pools, which could be an external operator or an in-house investment company. But the underlying schemes retain responsibility for strategic asset allocation. As a result, offering the schemes investment choice will be a critical factor in making the initiative work.
“Renewables are offering investors quasi-government-backed, long-term cash flows, that are well suited to meet the long-dated needs of defined benefit pension schemes,” said IEEFA analyst Gerard Wynn, author of the report, The Renewable Energy Infrastructure Opportunity for Local Government Pension Schemes (LGPS).
The IEEFA report explores whether the LGPS pools are offering their members flexibility and choice in investing in renewable energy infrastructure. Now is an important time to get LGPS pooling right, as the underlying schemes undertake a periodic review of their assets, a step they may use to adjust their asset allocation. This latest triennial valuation started in March 2019.
The IEEFA report found that four of the eight pools had taken different approaches to giving their members choice, including the option to invest in renewables, providing valuable lessons for other pools, including the London pool.
“Some schemes are more interested than others in investing in renewables. There is inevitably some need for compromise, given that pools have up to 32 members, as in the case of London,” said Wynn. “By offering more choice, pools could appeal to a greater number of schemes, and achieve greater overall allocation for renewable infrastructure, while respecting the preferences of their members.”
The report identified the following options for giving underlying schemes investment choice in infrastructure investment, including renewables:
Gerard Wynn ([email protected]) is an IEEFA energy finance consultant.
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