LPPI says replicating ‘Canadian model’ could unlock £16bn for infrastructure

Last week, the UK’s chancellor, Rachel Reeves, announced the government’s intention to replicate the “Canadian model” for local government pension schemes (LGPS), which could unlock a significant investment in UK infrastructure investment. 

However, Local Pensions Partnership Investments (LPPI) – the asset manager for investment pool Local Pensions Partnership (LPP) – and the Pension Insurance Corporation (PIC) have disagreed on how much this could unlock. The PIC has suggested that reforming local government pensions could unlock £40bn for infrastructure investment, while LPPI’s analysis suggests only a £16bn pot.

Last month, the Corporation estimated that UK LGPS funds manage a total of £400bn of assets. It pointed out that because that money is overseen by “a dozen of managers and local politicians”, LGPS schemes often pay “above-average” fees and invest very little in the most productive assets such as venture capital, life sciences and infrastructure.

PIC said that if the LGPS funds were amalgamated into a single scheme, it could invest in a similar way to the Canada Pension Plan Investment Board (CPPIB), which manages about £360bn to fund Canadian public sector pensions.

It said that around 9% of CPPIB’s assets are invested in infrastructure. By contrast, LGPS figures suggest that barely 3% of its total assets are invested in infrastructure.

It also quoted a 2022 LGPS board report stating that LGPS allocated £6.6bn to infrastructure, or 18.5%, and £3.9bn for private equity, infrastructure and other investments.

PIC said that a single LGPS fund running in a similar way to the CPPIB could invest up to £40bn into infrastructure such as green energy, electricity grids and transport networks.

However, PIC has not specified whether this would be for UK or global allocations.

Richard Tomlinson, chief investment officer at LPPI, has questioned PIC’s calculations in a recent LinkedIn post.

Tomlinson said that LGPS has “more like 6% in infrastructure currently and not 3%”, as he also challenged the £40bn figure, saying that LPPI’s research suggested that the reforms could unlock £16bn instead.

He said: “It’s not clear what the £40bn quoted is – equity cheque or EV post leverage? Or how this number is arrived at? Does it assume all current infrastructure allocations are disposed of and recycled?”

Tomlinson also said that while PIC suggested that LGPS infrastructure investment totals £6.6bn, with £3.9bn for private equity, infrastructure and other assets, LPPI has around £5bn in infrastructure alone and close to £2bn in private equity.

Responding to Tomlinson’s post, Mark Davies, co-founder of Novum Investment Management, questioned whether PIC’s number was “simply 9% of CPPIB allocation rounded up to 10% and applied to £400bn, ignoring the current allocations”.

LPPI today published its own analysis on how LGPS reform could unlock infrastructure investment.

Tomlinson said: “Our data is based on modelling every single LGPS scheme bottom up based on annual reports, ISS, etcetera. We’ve based the target infrastructure allocation on the weighted average SAA of the Canadian ‘Maple 8’ to infrastructure.”

LPPI’s analysis shows £16bn worth of capital for infrastructure investment could be unlocked if all the funds in the UK LGPS raised their allocations in the asset class from its current average of 6% to 11% – the same weighted average as the funds in the Maple 8 system. LPPI alone is currently 14% invested in infrastructure.

Mike Weston, former chief executive officer of LGPS Central, said that based on whichever numbers, there is potential for significant additional infrastructure investment “hopefully with most of it being able to be deployed within the UK”.

PIC did not offer further clarification on its calculations or comment on LPPI’s analysis.

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