Talking Head: Unlocking infrastructure investment on a large scale would be both highly beneficial to the economy and help defined benefit schemes meet their liabilities.
It was encouraging to see the government’s publication of its productivity plan, ‘Fixing the foundations: Creating a more prosperous nation’, shortly after the summer Budget 2015, outlining the commitment to creating a more prosperous nation, with infrastructure placed at its heart.
The right types of infrastructure assets can be a great fit for pension fund investors as they offer the low-risk, long-term, inflation-linked returns that help schemes meet their regular pension payment obligations over an extended period, and at a reasonable cost.
This kind of core infrastructure can act as a substitute for expensive index-linked gilts.
However, the risk profile of core infrastructure assets tends to be lower than is typically associated with greenfield infrastructure projects.
So while the productivity plan is a step in the right direction, it is important we start to see more government projects structured in such a way that sufficient risk is mitigated to make the projects an appealing investment opportunity for pension fund investors.
This initiative should be headed up by a minister with specific responsibility for infrastructure to help ensure institutional investors, including long-term investors like pension funds, can play a greater role in financing new infrastructure development.
There needs to be a clear pipeline of suitable assets, with appropriate structures and investment characteristics.
Collaboration
Pension funds are keen to do their bit to support investment in infrastructure.
Collaboration is a great way to achieve the scale that opens up access to investment opportunities and makes the upfront costs of pursuing them more affordable.
The Pensions Infrastructure Platform – which was developed by pension schemes for pension schemes – is an example of such collaboration.
Other collaborative initiatives – such as the joint infrastructure programme revealed earlier this year by the Greater Manchester Pension Fund and the London Pensions Fund Authority – are encouraging, and we are confident this is only the beginning of an increasing number of opportunities to enable pension funds to invest together in infrastructure.
There is clearly a demand from UK pension schemes for infrastructure-based assets that generate long-term, stable and inflation-linked cash flows.
Government can play its part as a source of these assets and maintaining a stable regulatory and fiscal environment.
Mike Weston is chief executive of the Pensions Infrastructure Platform
