FCA’s proposals a threat to infrastructure spend
The Pensions and Lifetime Savings Association (PLSA) has today responded to the FCA’s consultation, Markets in Financial Instruments Directive II, rejecting the classification of local authority pension funds as retail investors.
The proposed reclassification threatens the ability of funds within the Local Government Pension Scheme (LGPS) to invest in infrastructure as the majority of infrastructure investment firms are structured to explicitly exclude retail investors.
LGPS respondents to the PLSA’s most recent annual survey reported that 1.1% of their assets are invested in infrastructure. Across the whole LGPS this would equate to around £2.7bn of infrastructure investment at risk.
As a retail investor, there is no guarantee that asset managers would be willing to do business with LGPS funds, or would not impose significant cost for doing so.
Graham Vidler, director of external affairs, PLSA, said:
“The PLSA is a strong advocate of investment governance and we understand the need to ensure those making investment decisions have appropriate knowledge and understanding. However, the FCA needs to consider that local government pension funds have significant levels of investment expertise, a robust track record of effective risk management in investments, and considerable experience across a wide range of asset classes, including infrastructure.
“Reclassifying local authority pension funds as retail investors will prevent them from investing in certain asset classes such as infrastructure. With LGPS funds investing billions in infrastructure right now, and at a time when the Government is calling for greater infrastructure investment by pension funds, these proposals are counterintuitive.
“We urge the FCA to distinguish between the investment activity of local authorities and local authority pension funds, so the latter may retain its professional client status to continue its effective investment strategies.”
Currently, investments by local authorities for pension funds are already subject to high standards under the Management and Investment of Funds Regulations 2016. The regulation includes the requirement for pension funds to take ‘proper advice’ when appointing investment managers.
The FCA has proposed an opt-up provision for local authority pension funds to elected professional status. However this process is time consuming and provides no guarantees that future investment strategies will be effectively executed with existing managers or on existing terms.