UK - The executive of the Local Government Association (LGA) has authorised further investigation into the potential for establishing a collective investment fund for local authority pension schemes, so they may band together to invest in Private Finance Initiatives (PFI).

In a report presented at the Executive's meeting last week, Stephen Jones, the LGA's director for finance and performance, outlined two possible initiatives which might allow pension funds to invest in school PFI projects through long-term senior debt and equity.

The financial crisis and a decline in capital has meant "PFI has become expensive compared to pre-credit crunch times", particularly in relation to the larger "debt funding element" which normally comes from private sector lenders. So Jones stated in the report it would seem "worthwhile to explore two initiatives".

On the equity side it is suggested the LGA could promote a "collective investment scheme particularly designed for local authority pension fund investment in schools PFI".  

The Executive was told the scheme would need to "steer clear of legal issues such as potential State Aid", but the report suggested the option is "viable and attractive to investors", and there are already similar commercial funds in existence on the UK's stock exchanges.

On the debt financing side the proposal to is to introduce a collective investment fund to provide "long-term senior debt funding into schools PFI projects", as it added increased competition in the funding market and could help reduce PFI borrowing costs overall.

Jones noted these investments "would probably not be suitable for local authorities' general funds but might fit well with the investment criteria adopted by pension funds - perhaps particularly in the funding of PFI in the long operational phase that follows the initial financing of investment in construction".

However, the scheme would be entirely voluntary and would have to be "justifiable on strict investment grounds and comply fully with the legal responsibilities of local authority pension funds".

There would also be a need to avoid conflicts of interest that might arise from the fact councils are potential users of PFI, but are also investors seeking to maximise returns through their pension funds, said the report.

The Executive gave its approval for officers to "explore further with Partnerships for Schools, Partnerships UK plc, local authority pension funds and fund managers what scope exists for the creation of professionally managed funds designed to provide equity and/or debt for local authority PFI schemes, and structured so as to be well suited to investment by local authority pension funds".

A spokesman for the LGA pointed out it is "quite early days but the intention now is to move forward and talk to people in the market to if viable proposals can be drawn up. By acting collectively they can better maximise returns and reduce associated costs".

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