IEEFA report: UK Local Government Pension Schemes (LGPS) have multiple choices to access a growing market in renewable energy infrastructure
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:
- Appoint a fund manager that offers different choices (“sleeves”) for the participating LGPS, for example to invest directly in the asset or via the fund. The Central Pool is expected to take this approach towards private equity investment.
- Invest via an infrastructure joint venture, whereby the underlying schemes all have direct input into individual investments, the approach taken by the LPP and Northern Pools.
- Develop in-house infrastructure investment expertise over time, the approach taken by Brunel Pool.
- Develop a purely renewable energy mandate, for example via a specialist fund or fund-of-funds. No pools have adopted this approach.
Full report: The Renewable Energy Infrastructure Opportunity for Local Government Pension Schemes (LGPS)
Gerard Wynn ([email protected]) is an IEEFA energy finance consultant.
Media Contact: Vivienne Heston ([email protected]), +1 (914) 439-8921
About IEEFA: The Institute for Energy Economics and Financial Analysis (IEEFA) conducts research and analyses on financial and economic issues related to energy and the environment. The Institute’s mission is to accelerate the transition to a diverse, sustainable and profitable energy economy.
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