Was the Government’s Mansion House announcement on pension reform a win for place-based impact investing (PBII)? As you can imagine, we at The Good Economy (TGE) have been digesting this news and the implications for our own work which is focused on scaling-up institutional investment for place-based impact. Here’s my take.

What are the Mansion House Reforms?

To recap, the Government highlighted that the UK pension system is one of the largest in the world – with the Local Government Pension Scheme (LGPS) and Defined Contribution (DC) market set to manage £1.3 trillion in assets by the end of the decade. However, this pension system is very fragmented with around 86 LGPS administering authorities and 60 DC schemes. Treasury’s analysis suggests that pension funds make greater productive investment levels once the asset size of funds reaches between £25-50 billion. Their reforms focus on two strands:

• Consolidating LGPS and DC schemes into larger ‘megafunds’ that have the scale and professional investment management expertise to invest in large infrastructure projects and high growth businesses. For the LGPS, this is likely to result in further consolidation of the eight pools.
• Encouraging LGPS administering authorities to work more directly with devolved authorities to secure more than £20 billion for investment in local communities assuming each LGPS set a 5% target for local investment. However, while LGPS administering authorities will retain responsibility for setting investment objectives and their approach to local investing, the pools will take on all investment management responsibility.

What is Place-Based Impact Investing?

Place-based approaches to financing and delivering public services – including local and regional economic development – are well-established across OECD countries. They involve understanding the issues, interconnections and relationships in a place and coordinating action and investment to improve the quality of life for that community.

At The Good Economy we have applied a place-based approach to impact investing and called this ‘Place-Based Impact Investment’ (PBII). Our conceptual model was unveiled in seminal white paper Scaling Up Institutional Capital for Place-Based Impact which we published with the Impact Investment Institute and Pensions for Purpose.

“Investments made with the intention to yield appropriate risk-adjusted financial returns as well as positive local impact, with a focus on addressing the needs of specific places to enhance local economic resilience, prosperity, and sustainable development.”

What are the Implications of the Mansion House Reforms for Place-Based Impact Investing?

For us, PBII is bottom-up – it’s about investing in ways that respond to local needs, ambition and investment opportunities originated by local people in local places. So, the encouragement of LGPS to work directly with local and devolved authorities is welcome. There’s lots to be learnt from the pioneers of local investing, notably Greater Manchester Pension Fund and South Yorkshire Pensions Authority, who already work directly with their local and combined authorities to identify and make investments.

Scaling-up local investment will require developing new knowledge and institutional capacity on both local government and LGPS sides, a common language and building stable governance and investment strategy and decision-making processes.

However, with further consolidation of the pools, there is a risk that their focus will be on making larger scale investments and working with the largest asset managers to the detriment of local investment which requires a diverse ecosystem and smaller size investments – investing in smaller, specialist investment managers and project originators who have local knowledge and ‘boots on the ground’.

We believe the pools may need to develop a separate stream of activity for local investment. There is a diverse range of investment managers across areas including affordable housing, SME finance, clean energy and social investment all looking to raise capital and scale-up their local investment. We need better information flows across the value chain to increase knowledge about these funds as well as local projects. This has implications for the consultants and investment advisors to ensure they do not become a barrier to place-based impact investing.

Administering authorities will have the responsibility to monitor their investments. This should encourage more regular monitoring and assessment of place-based impact. We encourage the establishment of common impact measurement and management frameworks with LGPS and local and devolved authorities agreeing what the LGPS are able to invest in, the expected local benefits and monitoring and reporting results achieved, including reporting these to pension holders. The PBII Reporting Framework we co-created with a group of leading asset managers and asset owners is an easy starting point.

On our side we see our PBII Network as helping to build knowledge and trust across this investment marketplace. We are expanding our network to include a group of LGPS that are committed to investing more locally to share experience of UK investing and build relations and new investment models with local and devolved authorities.

Conclusion

The Mansion House Reforms offer a significant opportunity to boost place-based impact investing in the UK. By encouraging LGPS to work more closely with local and devolved authorities, and setting ambitious local investment targets, the government has signalled its commitment to this agenda.

However, realising this potential will require careful navigation. It’s crucial to ensure that the drive towards larger “megafunds” doesn’t overshadow the need for a diverse investment ecosystem that can cater to specialist investment funds and smaller-scale, locally-focused projects. Developing clear communication channels, standardised impact measurement frameworks, and strong relationships between LGPS, local authorities, and investment managers will be key to success.

The reforms are a call to action for all stakeholders in the PBII space. We need to work together to build knowledge, capacity, and trust. By doing so, we can unlock the power of pensions to drive positive change in local communities across the UK.

The journey ahead is challenging, but the potential rewards are immense. Let’s seize this opportunity to create a more prosperous and sustainable future for all.