The renewable energy infrastructure opportunity for Local Government Pension Schemes (LGPS)
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Key Findings
Some 89 local government pension schemes (LGPS) in England and Wales have recently created investment pools to bring together the management of their assets into eight collective investment vehicles, or pools.
The government’s goals for LGPS pooling included to allow pension schemes to benefit from economies of scale, for example to negotiate lower management fees, and acquire the skills to execute complex deals, especially in infrastructure.
The resulting pools of these like-minded schemes have in the main created Financial Conduct Authority (FCA)-regulated vehicles, or appointed FCA regulated operators, a number of which fall under the Alternative Investment Fund Manager (AIFM) directive.
Executive Summary
In this briefing, we review approaches by local government pension schemes (LGPS) in England and Wales towards investing in unlisted infrastructure, focusing on renewable energy. Infrastructure assets are “real assets” that generate predictable cash flows, for economic services such as transport, energy generation and water provision. Government interest in private investment in infrastructure has grown, leading to measures which provide investors with quasi-government-backed, longterm cash flows, well suited to the long-dated liabilities of maturing defined benefit pension schemes.
There are 89 underlying LGPS in England and Wales. These were recently aggregated into eight collective investment vehicles, or pools. The goals of this new UK government initiative included allowing the underlying schemes to benefit from economies of scale, for example to negotiate lower management fees, and acquire the skills to execute complex deals, especially in infrastructure. The underlying schemes had assets under management totalling £270 billion as of March 2018 (see Table 1 below).
The goal of this briefing is to explore whether pools are offering their LGPS members choice in unlisted renewable energy infrastructure. Under the government’s pooling guidelines, the LGPS are meant to invest via their respective pool going forward. However, the LGPS also retain responsibility for strategic asset allocation. The pools should therefore offer enough choice to respect those strategic preferences, while there is inevitably some need for compromise, given that pools have up to 32 members, as in the case of London. Our particular focus in this briefing is the London pool, called the London Collective Investment Vehicle (CIV).
Now is a good time to discuss allocations under pooled investments going forward. LGPS typically review strategic asset allocations after each triennial valuation, whose latest cycle started in March 2019. This process could lead to new and revised investment strategies in place from 2020, or in some cases sooner. 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.
This briefing is a result of discussions with a group of London schemes interested in greater allocations to renewable energy infrastructure via the London CIV, and a review of approaches taken by other pools towards renewable energy infrastructure, sourced from published material and direct correspondence with those pools. We conclude that there are multiple options for pools, including the London CIV, to offer their underlying schemes choice in investing in renewable energy infrastructure, according to their investment strategy, philosophy, and appetite for risk. As a result of our review, we note four broad approaches or options towards pooled investment in unlisted renewable energy infrastructure.
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