Local Government Pension Scheme (LGPS) assets under management are projected to increase to around £500 billion by 2033, giving the sector more opportunities to invest in unlisted equity assets, according to a report.

The PLSA’s November 2023 report, Pension Scheme Investments in Illiquid Assets: Case Studies from the Pensions Sector said: “The PLSA welcomes measures which improve access to invest in a broad range of assets. Pension funds will always be interested in exploring investments which have a strong likelihood of generating good returns, within their risk tolerances, and in the interests of their respective members.

The report comes at a time when the government’s scrutiny has turned to how pension schemes invest. Its Mansion House reforms urge schemes to turn their attention to investing in private markets.

The PLSA’s report sounded a note of caution. In the report’s introduction, it warned: “It is very important that pension schemes’ ability to direct their own investment strategy in the best interests of their members continues to be protected.”

This was echoed by the LGPS schemes. If the government introduces a target allocation to levelling up assets, it will create unintended consequences, Lloyd Whitworth, head of investment and stewardship at Surrey Pension Fund warned.

Whitworth said: “Surrey Pension Fund invests in private markets since these assets can bring diversification for the allocation, rather than focusing solely on listed equites and listed fixed income. Return and risk profiles can also be different to other asset classes at different points in the economic cycle.

“Since we assume a higher risk at early-stage investments, the fund should also expect higher returns for these investments, in excess of 10%. This is, in essence, the risk reward balance.

“This is an important aspect to consider if a target allocation to, for example, levelling up assets, is introduced for all LGPS funds, since risk may be mispriced as the weight of money drives down expected return. This will be a major risk to funds. The size of these investments may also be small in relation to the fund size, further hampering investment opportunities.”

The report reveals a number of trends in the way that LGPS schemes are investing in private markets.

Increasing private markets allocations
Private markets are attracting growing assets under management among LGPS schemes. For example, the West Midlands Pension Fund (WMPF)’s Paul Nevin, associate director (investment strategy) noted: “Over the last 25 years, our strategic allocation to illiquids has steadily increased as a percentage of WMPF’s return enhancing assets.”

Similarly, Philip Latham, head of Clwyd Pension Fund, observes: “The strategy is reviewed every three years at the strategy review and the allocation to these assets, now at 29%, has steadily increased over time.”

From growth to income
The WMPF may have started out investing in illiquids for diversification, but they have more recently shifted their focus. Nevin explained: “More recently, the emphasis in both liquid and illiquids has been away from growth assets to income generating assets. This is in the context of an overall lower risk portfolio and one that is more liability aware and conscious of cashflows.

“In the private asset portfolio, this has resulted in reduced allocations to private equity and increased allocations to private credit and infrastructure while maintaining allocations to property.”

Another mature LGPS scheme, the Merseyside Pension Fund, is also seeking income with its private markets assets. The fund’s director of pensions, Peter Wallach, noted: “We believe that long-term assets, such as regulated infrastructure and direct property holdings, will provide us with a degree of inflation-linkage and a growing source of income.”

Schemes are seeking to benefit the local economy
While most LGPS schemes emphasise their global approach to illiquid investing, they are also at pains to point out that they invest in their local regions when the right opportunities arise.
For example, the Merseyside Pension Fund has committed £400m – of which £100m is already invested – in the Merseyside area. The majority of investments are in property loans, which give the scheme income and commercial upside, while regenerating the local community.

Peter Wallach added: “In 2016, with the approval of its Pensions Committee, MPF launched the Catalyst Fund.

“Its aim is to help deliver economic growth projects across Merseyside by providing debt and equity investments, while producing a commercial return for the Pension Fund. Catalyst’s strategy sought to align with the Liverpool City Region Growth Prospectus, principally for sustainable economic growth through regeneration and employment growth.”

The West Midlands Pension Fund also lists providing an opportunity to invest locally among other benefits to investing in private markets. Paul Nevin explained that the fund has invested in direct property, infrastructure, housing and small companies, when the right opportunities have come up.

Nevin explained: “Recent examples of local investment include a West Midlands sustainable infrastructure fund, debt finance for a help-to-own scheme for local residents and a fund in partnership with the West Midland Combined Authority, providing equity to innovative businesses with high growth potential, aligned to Levelling Up missions and targeting initiatives which support climate transition and build sustainable futures.”


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Published: November 30, 2023
Home » Government warned by LGPS schemes not to interfere with their investments

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