How the local government pension scheme can scale up investment in affordable housing

The UK government’s 2025 pension reforms have challenged the local government pension scheme (LGPS) to develop local investing strategies. With nearly £400bn of assets today and projected to reach £1tn by 2040 – the LGPS has the potential to be a cornerstone of the national effort to close the investment gap, and build a more resilient, inclusive domestic economy.

In response to the government’s pension reform agenda, The Good Economy has published a new white paper, Scaling-Up Local Investing for Place-Based Impact: A Strategic Framework and Guidance for LGPS, which paves the way for a new era of place-based investing. The framework provides guidance on how the LGPS can balance delivering strong returns with investing in local priorities such as affordable housing, regeneration and infrastructure.

The paper notes that there has been an increase in UK and local investing activity across individual LGPSs and pools since their first white paper in 2021. Investment in housing has been a significant and growing area of investment for many LGPSs and is now expected to scale considerably with the government’s requirement to develop local investment strategies.

The UK housing sector presents a highly strategic and investable opportunity for LGPSs and other institutional investors. Chronic undersupply, government policy support and worsening affordability have created strong, long-term demand fundamentals. Housing investment offers stable, inflation-linked returns, counter-cyclical resilience, and powerful local benefits spanning regeneration, employment, health and energy-efficiency goals.

Within housing, there are different investment sub-sectors with different expected risk and return profiles, delivery models and local demand considerations. These include social and affordable housing, specialist supported housing, temporary accommodation, older people’s housing, build-to-rent and private market sale housing.

Investment strategies range from the acquisition of existing housing stock to provide low-risk income streams – for example, acquisition of shared ownership from non-profit housing associations to release capital for new housing development – through to higher-risk investment in new housing developments for which investments will expect higher returns.

Greater Manchester Pension Fund (GMPF) provides a good case study of a diversified housing investment portfolio – ranging from new-build apartments aimed at attracting professionals to city centre areas through to affordable housing for low-income households. GMPF’s early investments in housing were concentrated in the city centre, and fuelled the build-to-rent boom and revitalisation of the city centre – from a few hundred people living there in the early 1980s to somewhere close to 100,000 today.

More recently, it has made investments in Resonance’s Homelessness Property Fund and Bridges Greater Manchester Better Outcomes Partnership, a collaborative initiative that offers support to young people aged 18-25 who are at risk of homelessness. Further large-scale investment in social affordable housing is planned in partnership with Greater Manchester Combined Authority. This portfolio diversification allows GMPF to optimise its investments to achieve both local and regional impact, alongside meeting its financial return objective of CPI +2.0-2.5%, with a benchmark of RPI +4% for the local investment portfolio.

The government’s new policy makes clear that, while pools and underlying LGPS funds should collaborate on developing local investing strategies, execution responsibility lies squarely with the pools. This should enable economies of scale but also requires pools to develop deeper investment capabilities and relationships with local government, particularly strategic authorities (SAs), which are expected to put forward priority housing and other investment projects.

Fortunately, there are existing housing models and experienced investment managers that are likely to play an important role in investment origination and management, a number of which are highlighted in the white paper (including L&G, Thriving Investments and Savills Investment Management). However, we also expect new housing investment models to develop.

Recommendations from the framework include:

• Tailored local investing approach – local investing will not work with a one-size-fits-all approach. Administering authorities (AA) and pools should have a tailored, context-specific approach that considers each organisation’s geography, governance model and delivery capacity.
• Collaboration is essential for local investing strategies – success will require active collaboration between the LGPS and a range of stakeholders, including SAs, central government agencies and other institutional investors, such as the Mansion House Accord signatories, to deliver investment at scale.
• Establish a common impact reporting standard – the LGPS sector should collectively establish a common impact reporting standard ensuring consistency, comparability and transparency of impact reporting – and stakeholder accountability for the local economic, social and environmental impact of local investing.
• Map and align – a useful early step is for AAs and pools to map their local investing knowledge, capabilities and ecosystems, and consider formalising relationships with SAs (eg through MoUs) to build shared expectations and decision-making processes.
• Broaden the pipeline – pools can strengthen the flow of investable opportunities by working with public funders and other partners to bring forward projects that align with local growth plans and regional priorities, including the use of blended finance where this helps unlock opportunities.
• Scale with partners – pools may wish to explore opportunities to co-invest with Mansion House Accord signatories, DC funds, other private investors and fellow pools to achieve greater scale.
• Enable inward investment – AAs and pools can look to ensure their allocations are supportive of regional inward investment ambitions, embedding these objectives in product design and engagement with fund managers.
• Share expertise that benefits all – implement collective mechanisms that enable collaboration across the LGPS for the benefit of all, while maintaining fiduciary independence. GLIL is a good example of a large-scale, cross-pool fund investing in infrastructure.
• Maximising local impact and balancing financial return – local investing strategies will need to consider how to balance financial returns and local impact. Portfolios should meet financial return and funding objectives, but also nurture local ecosystems, support innovation and maximise local impact – all without compromising fiduciary responsibilities.
• Streamline requirements – a systemic review of reporting obligations could reduce duplication and reconcile overlapping needs of public bodies and investors. Establishing common approaches would help ensure that time and resources are focused on delivering outcomes.

There are significant viability challenges and skills gaps across much of the country. While the LGPS cannot solve these issues alone, it is ready and willing to play a greater role in addressing them.