The Welsh pension fund experimenting with an investment in social housing

Like most local government pension funds, Swansea is mostly invested in listed equities. “For a long period of time, we were underfunded… and the primary focus [for the last 20 years] was on maximising returns and closing that funding deficit,” says Mr Dong.

“However, as the funding position has improved in the last decade or so, this has afforded the pension fund committee’s objectives to broaden, to incorporate social and local impact.

“Our local pension fund committee… were very keen that some of that capital was deployed locally and did address the local housing crisis that we’re experiencing in Swansea.

“It’s one of the most economically deprived areas of the UK, and other potential partners have found those economic metrics hard to deliver… but Hugo and his colleagues have managed to present a proposal which helps to deliver that.”

Social value isn’t the only reason pension funds are interested in housing, however. Their demographics are maturing: more policyholders are getting older and becoming pensioners, creating a need for more steady streams of income to pay them. Traditionally pension funds got steady income from bonds, but the last decade or so has shown quite a lot of volatility in the bond market – hence the growing appeal of ‘real assets’ like property and infrastructure.

Mr Dong admits that £51m is a “tiny” allocation relative to the overall size of the Swansea pension fund. “But there’s a lot you can do with that money in Swansea, because it’s a poor area,” Mr Llewelyn puts in.

Newcore’s boss has a personal interest in the project: he grew up in Abergavenny in South Wales and has family in Swansea. He has invested £500,000 of his own money alongside the council’s money and is giving the profits from his stake to social and environmental charities linked to Swansea. (Newcore does not charge performance-related fees on the fund but it gets a management fee from the council for running it.)

The aim is for 48% of the £51m local impact fund to be allocated to “social housing and genuinely affordable housing”, which translates into about 700 new homes and 100 refurbished homes, according to Mr Dong.

L&G’s affordable housing model in England works differently – the pension scheme invests into a fund, L&G buys homes, then owns them via a for-profit provider. By contrast, Newcore wants to buy land, get planning permission for housing then sell it to non-profit housing associations.

“That’s how Wales works – they buy from us – but we like that,” says Mr Llewelyn. “You get your return and you recycle it again… It might be that you get to a model where they end up renting it from you, [but] it’s a for-sale model at the moment.”

“I was never a fan of George Osborne’s decision to make [for-profit providers], but I can see why they did it… and there are some very good businesses that do it,” he adds.

One scheme in the pipeline is a former hotel in Port Talbot which will be refurbished into housing with a social landlord as development partner.

“We’ve got one relationship bubbling away where we’re coming through to the first deals, which won’t be too far out,” he says. “But talking to the big housing associations in Swansea, there’s really good interest in working with us, because sitting behind us is the local authority.”

As well as housing, 42% of the local impact fund will go to social infrastructure and the remaining 10% will go to social care. “There’s huge demand for social care, and how does it get delivered?” asks Mr Llewelyn. “If there can be a harnessing of local government pension fund money by private sector managers, then you can get a very nice conduit, where the long-term pension fund’s aims meet the short-term aims at the operating side of the council.

“We’re working in other areas of the country with local authorities in social care, for example, where we will buy land, build accommodation for care-experienced young children and then lease them to the councils, and these councils are invested in our fund.” (Newcore said it is unable to name any of these councils at this stage.)

“It would be very messy if the pension fund started funding those assets directly, and they didn’t work out,” says Mr Dong. “Hugo and Newcore provide the conflicts of interest ‘solution’.”