As reforms seek to scale public sector funds to local powerhouses, private markets and real assets investments are helping them to achieve place-based impact.
Decades of underinvestment have entrenched regional and social inequalities in the UK, which now faces fresh pressures from geopolitical and economic uncertainty. Yet the Local Government Pension Scheme (LGPS) – with nearly £400 billion (US$538 billion) of assets today and projected to reach £1 trillion by 2040 – has the potential to be a cornerstone of the national effort to close the investment gap and build a more resilient, inclusive domestic economy.
This is the view of advisory firm The Good Economy (TGE) which has proposed a framework to help government deliver on its 2025 pension reforms which challenge the LGPS to develop local strategies that support the wider effort to boost growth, jobs and productivity.
Just 3.5% of LGPS’s total assets are invested in local or national projects. This is an increase on the reported 2.4% allocation made in 2020, but still falls short of the 5% target the government would like to see invested in domestic infrastructure, clean energy, SME finance, housing and regeneration.
In 2025, the government outlined a raft of legislative and policy measures designed to drive UK public and private pension fund investment in domestic assets.
Under the forthcoming Pension Schemes Bill – currently being scrutinised in the second chamber of the UK parliament – the LGPS will see governance transfer from multiple administering authorities into asset pools with a minimum of £50 billion in AUM by April 2026. By 2040, each pool will have minimum assets of between £100 and £200 billion.
The legislation demands that local government pension schemes set out their approach to local investment, including a target range within their investment strategy statement, and collaborate with local authorities, mayoral authorities and other strategic bodies to identify potential local investment opportunities.
TGE finds that if 5% of LGPS funds were allocated to local investment – much of it through private markets – it would unlock £16 billion for place-based impact investing (PBII), “more than matching public investment in levelling-up”.
Scaling up investment
TGE identifies several LGPS pools that have responded to its 2021 call to action to scale-up investment in PBII for the benefit of communities across the UK.
The £8.08 billion London Pension Fund Authority (LPFA) invests £1 billion in UK-based real estate and infrastructure, and allocates 13% of the total to projects designed to support local communities across the UK.
Eighty percent of the LPFA’s real estate investment is in London or the southeast of England, much of which is dedicated to affordable housing. This includes a £150 million investment in The London Fund, a collaboration between Local Pensions Partnership Investments (LPPI), which provides pension and investment services to the LGPS and fellow pool London CIV.
Paul Hewitt, Responsible Investment Manager at LPFA, said: “Investing locally is not new to us, but when you look through our responsible investment policy, and particularly when you look at our beliefs, we know that it’s important for our members to support local projects.”
LPPI’s London Fund invests in a diversified portfolio of real estate, infrastructure and other private markets investments to provide sustainable, long-term and risk-adjusted return, while creating a ‘double bottom line’ through job creation and regeneration for Londoners and the southeast.
The London Fund’s housing portfolio includes almost 3,000 homes under management and 1,870 homes under construction across London’s East Village, Stratford and Elephant and Castle, and will develop 15,000 homes within the next five years.
Louise Warden, Head of Real Estate at LPPI, said: “We focus on real assets because they are a tangible way to address local needs and generate long-term, stable returns. It’s down to the partner funds to decide what local means to them, but for the London Fund and LPFA specifically, we look to deliver a double bottom line which we measure through financial return and positive social outcomes.”
In addition to LGPS pools, private-sector pension providers are also investing to address London’s social housing challenges. Last year, Phoenix Group partnered with Macquarie Asset Management to fund the £235 million acquisition of temporary accommodation properties by Westminster City Council. The deal requires refurbishment to a minimum energy efficiency standard, provides a guaranteed rent level, and offers the council the option to own the properties at term end.
Bespoke measurement
The wider LGPS framework does not have a single definition for what constitutes positive social impact. Instead, it refers to investments that generate measurable, beneficial social outcomes for local communities alongside financial returns.
Each pool is free to set its own responsible investment policy and the outcomes it wishes to achieve.
Consequently, LPPI’s London Fund investment team looks at each asset to determine its potential positive outcome and decides whether this will be suitable for the underlying investors.
This individual approach to PBII has required LPPI to build a bespoke set of monitoring and measurement criteria to ensure the investments are on track.
Warden said: “Rather than applying a broad set of criteria across the fund, we look at the material impact each underlying investment will have. The monitoring aspect is something that we’ve had to build bespoke to the mandate. There’s nothing off the shelf in terms of what we can report to our clients. We have built this from the ground up and the team has put a lot of work into making sure that we’re putting forward the most relevant metrics.”
The London Fund currently reports a quarterly Positive Social Outcomes (PSO) dashboard that includes a qualitative update on ESG/PSOs and stewardship activities relating to the assets in the strategy. Where data is available, they also provide annual TCFD (Task Force on Climate-related Financial Disclosures) metrics.
Warden added: “Quarterly manager reviews are conducted by the London Fund team through monitoring calls. Within these manager calls, questions are asked around material ESG incidents, progress on ESG/PSO integration and examples of good stewardship. Each manager also provides a quarterly reporting pack, which includes sections specific to ESG. LPPI reports these updates in the quarterly PSO dashboard that is presented to the joint committee.”
Hewitt has witnessed an “explosion of AI tools” offering new ways of monitoring social impact, only some of which is proving useful.
“A lot of providers are knocking on our door on a regular basis, offering ways of finding new data that can help shed light on social impact. It’s about making sure that we can see the wood for the trees in terms of what’s relevant to us.”
Warden says LPPI is sharing its measurement approach with external providers in a bid to improve consistency in how PBII is assessed across LGPS funds.
In addition to real estate, the London Fund also invests in local infrastructure assets.
Warden noted: “The fund continues to explore local infrastructure investment opportunities. While we are unable to discuss our current pipeline, typical infrastructure investments considered by the London Fund include digital infrastructure, solar energy, waste-to-energy, electric vehicles, and rail networks.”
A nationwide view
Another PBII-focused fund manager working with LGPS pools is Octopus Capital, the private markets arm of Octopus Investments, whose Affordable Housing Fund includes allocations from Strathclyde Pension Fund, London CIV and the Avon Pension Fund.
The fund invests in energy-efficient affordable housing across the UK which the manager says addresses the UK’s housing shortage while delivering a long-term return.
Jack Burnham, Head of Affordable Housing at Octopus, said: “There are different schools of thought on what PBII should achieve. Some investors prioritise fiduciary duty, while others will prioritise supporting local impact. We wanted to come up with a solution that crossed that divide.”
Burnham says that while Octopus does have capacity to work with co-investors to allocate on a ‘hyper local’ basis, the preference is to follow the pipeline of investment opportunities nationwide.
However, Burnham noted that should a hyper local project arise, Octopus can invest in alongside the main fund.
Burnham said: “The good thing about affordable housing is that the valuation methodology, the type of housing and the underlying dynamics are broadly similar across the UK, and we can set the same returns hurdles, so the preference is to invest via the main fund. But if we find an investment opportunity specific to one of our locally interested partners, then we will offer it to them as an additional co investment opportunity.”
Positive momentum
Burnham said he has seen initial investments in affordable housing lead to further development within the same location. For example, the £6.4 billion Devon County Council pension fund allocated £40 million to the Affordable Housing Fund in 2024 which supported development of 40 new homes.
By December 2025, Octopus has agreed a forward funding deal to support the delivery of 82 new affordable homes across Northam and Bideford.
The rented homes will be advertised locally ensuring they directly support the needs of the North Devon community.
Burnham said: “Originating one or two assets in an area gives the fund a presence and, once you put down roots, naturally further investment will follow.”
The Devon project also received grant funding from Homes England, the government’s housing agency, and Burnham believes such state support is critical in achieving wider PBII aspirations.
“We are starting to see more grant funding for affordable housing, which is powerful because it broadens our investment opportunities.”
In its current form, PBII is about uniting to support the UK’s wider growth ambitions, rather than allocating to hyper local opportunities. But as the LGPS amasses its predicted £1 trillion in assets by 2040 and as more projects meet the strict investment criteria imposed by schemes and their fund managers, so the opportunity to make a difference on their doorstep looks set to increase.
