In her first Mansion House speech on 14 November 2024, chancellor Rachel Reeves set out her wish that the 86 Local Government Pension Scheme (LGPS) administering authorities should consolidate their assets into eight pools or ‘megafunds'. The goal is that with collective assets currently valued at £392bn, and forecast to rise to £500bn by 2030, the combined heft of the LGPS will help unlock – in partnership with private pension funds – up to £80bn for investment in vital domestic infrastructure projects including transport, energy and housing projects.
Picking up the mantle of the speech, Localis has been investigating, along with Isio and Local Partnerships, to understand what a practical policy route map for LGPS reforms to specifically address the crisis in affordable housing could look like.
The final report, New Stable – expanding and reforming the role of the LGPS in driving affordable housing argues that by creating appropriate investment vehicles and funding principles, supported by clear government incentives, the LGPS can become a vital source of patient capital directed towards addressing the UK's chronic under-investment in genuinely affordable and social housing. Furthermore, New Stable argues there is potential for a long-term, stable lower rate of local authority contributions into the LGPS, which could decrease pressure on council revenue expenditure.
With an aggregate surplus of around £45bn total in June 2024 (on a low-risk basis), LGPS funds are in a strong position to help in the drive for domestic infrastructure to foster economic growth
We don't think this is too good to be true. In context, the Government has placed the delivery of homes at the centre of its agenda for this parliament. This ambition aligns with a broader policy push to increase institutional investment into the UK economy. The LGPS in England and Wales exists as a key mechanism to achieve this through the policy of pooling. The consolidation of LGPS funds' assets into larger management entities would reduce costs, increase returns, and enhance capacity for strategic asset allocation, particularly towards infrastructure and housing.
With an aggregate surplus of around £45bn total in June 2024 (on a low-risk basis), LGPS funds are in a strong position to help in the drive for domestic infrastructure to foster economic growth. The reforms aim to create a framework that incentivises this investment while ensuring funds maintain their fiduciary duty. However, New Stable suggests an alternative approach to the surplus would be to adjust employer contribution rates downwards, allowing local authorities to retain more of their general funds and gain financial flexibility for pressing local priorities.
Intense pressure on public services is as significant a barrier to growth as underinvestment, with the two issues intersecting most clearly in the worsening housing crisis. Some in the sector advocate exploring whether a long-term reduction in employer contributions might release revenue savings to help address the chronic underfunding of the sector. This doesn't have to be an either/or choice; a two-pronged approach using the LGPS surplus could involve both targeted investment and sustainably lower contributions to build capital and capacity for local growth.
We also mustn't underestimate how the housing crisis itself is a major barrier to economic growth, primarily due to a lack of supply. Crucially, the severe shortage of genuinely affordable and social homes puts pressure on council services, such as temporary accommodation, and causes significant downward pressure on disposable income due to escalating housing costs.
While government focus is on innovation, addressing the root causes of the housing crisis is arguably more suited to LGPS investment given its nature. Investing in genuinely affordable and social housing aligns well with the long-term characteristics of pension schemes. Such investments, particularly social housing with its government subsidies and guaranteed rental income, can offer stable, inflation-linked returns.
The LGPS already has a developed approach to Environmental, Social, and Governance (ESG) investing, and investment in social and affordable housing fits these principles. Many LGPS funds already co-invest in affordable housing. The task for policy must be to maximise this investment and provide options for LGPS surplus management to help address the housing crisis.
Addressing the housing crisis through investment can give local government a more strategic purview and contribute to economic growth. Well-managed LGPS housing investment at the local level could even serve as a blueprint for wider local investment, combining government capital and private finance for multidimensional socio-economic returns. With a nod to the national Plan for Change, the Government should ensure that statutory local growth plans and spatial development strategies produced by strategic authorities effectively align and synchronise an infrastructure pipeline and align with LGPS local investment strategies. These plans also need sufficient central government support and resources to be credible and effective.
Effectively utilising the LGPS for social housing requires understanding the public sector institutions involved in planning and financing new homes. This complex landscape includes local government, housing associations, and central bodies like the National Wealth Fund (NWF) and Homes England, all crucial for enabling LGPS investment.
New Stable argues that the NWF should also have its mandate extended to include the provision of social housing as significant national infrastructure. The report notes that Homes England is well-positioned to provide central oversight of the national affordable housing development pipeline, potentially packaging it into a more attractive investment proposition for institutional investors. Homes England should also, we argue, offer investment expertise to LGPS pools to encourage more diverse housing investment strategies.
Investing in affordable homes is very much a case of horses for courses. And there's no reason why picking the right partnerships working across the LGPS megafunds and the strands of local and regional and national government, we shouldn't be able to pick the winner.
Jonathan Werran is chief executive of Localis
