The proposals, which are now out for consultation, include an option to double the amount that so-called 'Town Hall' pension funds can legally invest in infrastructure.
The amount that fund managers can currently invest in partnership arrangements is limited to 15% to ensure that any risk is spread across different types of investment. Partnership arrangements are the main type of asset vehicle used for major property, private equity and infrastructure projects.
Local Government Secretary Eric Pickles said that up to £45bn could be raised for housing, roads or high speed rail projects if every council chose to invest the maximum under a potential new regulatory regime.
"Unlocking Town Hall pension pots so that they can be used to invest in vital infrastructure projects is a commonsense decision that will help this country compete on a global scale and get Britain building," he said. "By lifting the restrictions controlling local pension investments, councils could pump a further £22bn directly into job-creating infrastructure projects that will boost our economy. This is potentially a huge development and investment opportunity we simply cannot afford to ignore that also allows us to maintain long-term value for money for the taxpayer."
The Government has identified £250bn worth of infrastructure investment opportunities as a means of regenerating economic growth. However, it has acknowledged that much of that investment will need to come from the private sector.
Last November, the Treasury signed a Memorandum of Understanding with the pensions industry agreeing to work together to help establish an efficient investment platform for pension fund managers. The Pension Investment Platform, which has had early support from the West Midlands Pension Fund and Strathclyde Pension Fund, is due to launch in the first half of next year.
Graham Robinson of Pinsent Masons, the law firm behind Out-Law.com, stressed the importance of investment in infrastructure as a means of unlocking growth and employment at a regional, as well as national, level.
"Investment in infrastructure has a much larger impact on the economy than tax cuts or investment in other sectors, which produce a much lower return on investment," he said. "Construction is a localised industry and 92.5% of the supply chain is within the UK - much higher than industries such as automotive or defence where a higher proportion of any investment flows outside the UK."
Pension funds traditionally "shunned" the opportunity to invest in the construction of new infrastructure projects as they preferred "less risky and more stable" operational infrastructure assets that were already generating proven returns, Robinson said. "However, in their search for better risk-adjusted and index-linked returns, and with the possibility of UK Guarantees for important local infrastructure, new models are beginning to emerge," he said.
Robinson said previously that the UK Guarantee scheme, which was announced by the Government in July as a means of approving the attractiveness of major infrastructure projects to investors, could be used to reduce the risk for institutional investors such as pension funds.
Local government expert Alan Aisbett of Pinsent Masons said that although the potential change could create the opportunities for additional infrastructure investment from pension funds, it would not necessarily lead to a flood of new finance.
"We have to be realistic and appreciate that local authorities are no different from other pension funds in achieving necessary returns," he said. "They also have the additional requirement of achieving best value for council taxpayers. So whilst the opportunity may be being created; first, local authority pension funds must focus on returns and not politics and secondly - and this is critical - the [project] pipeline needs to be visible if funds are to be set aside.
Pensions law expert Derek Stroud of Pinsent Masons said that the proposal showed that "some thought" was being given to the procedural hurdles preventing funds from investing more in infrastructure. However, he warned that other barriers to investment remained.
"Whilst the proposed change might unlock a potential technical blocker to public sector pension schemes investing in infrastructure funds, it does not address many of the other issues which pension funds have in relation to investment in infrastructure," he said. "For example: spread of projects, understanding construction, operational and decommissioning risk and management fees."
He added that the consultation process could also reveal a desire to increase the limit on investment in partnerships generally, rather than limiting this to infrastructure funds.
"Some have argued for an increase to the limit long before the push for infrastructure investment," he said. "They may use that as a convenient reason to have the limit increased generally."