Jon Tabbush looks at how council pension funds can revitalise neighbourhoods.

When you pay into your pension each month, that money goes into a pension fund. It’s then invested – normally in long-term, low-risk projects – to hopefully grow.

This means funds can hold a lot of money. In London, pension funds for council employees hold £48 billion in assets. Across England and Wales, they’re worth nearly £350 billion.

Making a difference locally

Of course, the most important thing about pensions is making sure they can reliably pay out to the retired people who paid in. But in the case of council pensions, could we also use this local money to make a difference locally?

All pension funds are increasingly looking to create positive social and environmental change, as well as financial growth.

When a pension fund invests in a local area, this is called ‘place-based impact investment’ (PBII). This could include investing in social housing, regeneration projects, or providing funding to local small businesses.

If every London local authority pension fund allocated just 5 per cent of their portfolio to place-based impact investment, £16 billion would be made available to spend.

This can’t replace government funding. British governments have repeatedly failed to lobby pension funds into infrastructure investments they found inappropriate.

But significant and targeted local investments could create a positive cycle that saves councils money: investments increase growth, reducing demands on local services.

Challenges and evidence of investing pension funds locally

Is this possible?

Councils are often concerned that investing locally for impact may not meet their pension fund’s legal duties. (All pension funds are legally required to invest in the best of interests of their members – this is called a ‘fiduciary duty’.)

However, The Law Commission has concluded that funds are legally allowed to invest for social impact and the approach has the approval of government, who included a 5 per cent target for local investments in their Levelling Up White Paper.

And in fact, there is evidence that investing in local areas will bring financial benefits to the fund in any case.

The Clwyd Pension Fund is a council pension fund in Wales. Clwyd allocates 4 per cent of its portfolio to local and impact investments. This 4 per cent has outperformed the average investment across the Fund by almost 100 per cent.

And when comparing types or ‘classes’ of assets to invest in, the ‘alternative asset’ class – which includes investments in affordable housing – was recently shown to have the best ratio of risk to return of any class in both public markets and private markets.

Conclusion

The evidence is clear that this approach can work. Councils should be brave and dip their toes into place-based impact investment.

This blog is part of a series on making the most of local authorities’ assets. Read more about how procurement spending can benefit communities and Why council owned property is worth more used, not sold

Our upcoming report on Local Authority Assets investigates London councils’ experiences with investing their pension funds for social value and offers recommendations for councils interested in exploring place-based impact investment.