Three local authority pension schemes have revealed their plans to invest in infrastructure collectively, as they look to reduce management costs and diversify their portfolios to protect against market falls.
The Avon Pension Fund, Dorset County Council Pension Fund and Swansea City and County Pension Fund have tendered for managers together through consultancy JLT Employee Benefits, with the group expecting further funds to join.
The skill of the manager is in finding the assets in the first place
Giles Frost
Infrastructure investment has attracted a lot of interest in recent years, as schemes have sought to reduce exposure to equity volatility and provide a liability-matching investment.
“We’ve been looking at the space for a while now,” said Jeffrey Dong, chief treasury officer at Swansea City and County Pension Fund. “We’ve diversified towards alternatives for downside protection when equities don’t perform.”
Dong said that while equities were still a good option in the long term, the scheme recognised their volatility. Infrastructure assets also offer better capital protection as they are backed by physical structures, he said.
Schemes are using such structures to drive down fund management fees. Council schemes are increasingly investing together and being charged as a single client, sharing fees across the group.
“[Collaboration is] definitely a good way to leverage against a fee model,” said Dong.
Last year the Department of Communities and Local Government released a call for evidence on the running of LGPSs, which proposed merging the 89 local authority funds into fewer, larger funds, but some say efficiencies can be achieved simply through collaboration.
“DCLG is looking for more cross-scheme working,” said Dong. “Historically we would have tendered on our own but JLT came to us and proposed a solution that would reduce procurement costs. We felt the collaborative approach was in the spirit of the LGPS reforms.”
The individual schemes will still be free to appoint their own individual managers to match their risk profile, Dong said, adding: “It’s in the [manager] evaluation that we apply our own criteria.”
Finding investment value
High management fees have led this asset class to some criticism in the past, with initiatives such as the Pensions Infrastructure Platform being created in 2011 in an effort to help schemes access economies of scale.
Pip is looking to invest primarily in UK-based secondary public-private partnerships. The exercise being undertaken by these funds is considering investing in international projects.
“We are willing to accept projects from anywhere in the world,” said Guy Hopgood, investment analyst at JLT Employee Benefits.
Nick Buckland, head of treasury and pensions at the Dorset fund, said the schemes may end up investing in Pip, but wanted to consider their options. “First we need to look at what’s out there,” he said.
Some experts have warned that by focusing on fees, schemes risked missing out on high-quality investment opportunities.
Giles Frost, director of global infrastructure fund International Public Partnerships, argued that the fees charged on infrastructure investments were inexpensive compared with private equity or real estate investing.
“Fees are the number-one topic; pension funds would rather get bad performance and good fees,” said Frost. “The skill of the manager is in finding the assets in the first place.”
Frost added that schemes may overestimate the number of suitable good quality investments available.
“The scarce commodity isn’t cash,” he said.
