Chancellor George Osborne used his Autumn Statement to announce a plan to “unlock” pension funding for infrastructure investment. But Owen Walker finds schemes cautious of the risks associated with such deals
The Treasury is seeking £20bn of pension investment for UK infrastructure projects but schemes have said the deals need to be designed to suit their needs.
As part of his Autumn Statement, chancellor George Osborne announced the New Infrastructure Plan, which he labelled 'British savings for British jobs'.
He said: “The government has negotiated an agreement with two groups of British pension funds to unlock an additional £20bn of private investment in modern infrastructure.
“We can today give the go ahead around the country to 35 new road and rail schemes that support economic development.”
The policy has been backed by the National Association of Pension Funds, the Pensions Protection Fund and the Confederation of British Industry, among others.
Infrastructure should provide pension schemes with long-term, reliable income streams.
The government is hoping this could be seen as a more attractive alternative to gilts.
But schemes have warned these deals may only be suitable for the largest funds.
They are also wary of the use of leverage – or debt – common in such deals.
Infrastructure professionals have warned schemes considering investing in long-term projects to make sure they understand the risk characteristics and often complex legal structures surrounding such deals.
This will ensure they have a better idea of the long-term returns they can expect to get from such investments and be able to manage the risks better.
This will also help them avoid any unexpected legal costs if the investments go wrong.
Scheme concerns
“We can play a big part but we need managers to offer the fund structures that meet our interests,” said the head of investment at a £1.5bn scheme.
“We don’t need leveraged private equity returns from infrastructure if it is sitting on our liability-matching portfolio.”
The group pension director of an £800m scheme added: “Infrastructure should be a great one for pension schemes as it should throw off cash flows like fixed income.
Any infrastructure investments must be justified on investment grounds rather than because they are a good thing
“However, there is always significant debt in the underlying asset and this can scare trustees. It can all go wrong if there is any economic sensitivity here.”
But while investment in infrastructure was seen as an attractive diversifier by a number of pension funds contacted by schemeXpert.com, this was qualified by concerns about the amount of debt being used in such deals.
Schemes were also wary of deals that were designed more to provide the government with investment rather than to meet the long-term goals of pension plans.
“Financing growth in the wider economy is not our role – our purpose is to maximise return for our members,” said the investment manager at a £2.8bn scheme.
“Any infrastructure investments must be justified on investment grounds rather than because they are a good thing.”
Other scheme representatives said they would only be interested in unleveraged deals as they seemed like a safer investment.
Need for education
But Boe Pahari, head of European infrastructure at AMP Capital, said it was worthwhile schemes considering investments with low levels of debt that were still classed as low risk.
The real risk in these investments predominantly lies in the operations, irrespective of leverage
“We must remember the real risk in these investments predominantly lies in the operations, irrespective of leverage,” he said.
“However, with solid management and sector expertise these investments can be well managed.”
David Wright, pensions partner at DLA Piper, said UK schemes lagged behind their Canadian and Australian counterparts in their knowledge of how to invest in infrastructure.
“The key issue for UK pension fund trustees is getting training in the risk characteristics of such investments and the complex legal structures to which they are sometimes subject,” he added.
