The local authority scheme has agreed in principle to commit £100m to a government-backed initiative aimed at removing the four main risks of infrastructure investment

The investment is made through Strathclyde’s New Opportunities portfolio, which it set up three years ago to take advantage of attractive assets that do not fit in with its overall investment structure.

Four main infrastructure risks

Strathclyde identified four main risks of infrastructure investment, which are detailed below:

  1. High fund management charges can eat into returns;

  2. Schemes often have a lack of in-house expertise to deal with such investments;

  3. The overly leveraged nature of many deals can lead to reduced inflation linkage; and

  4. Highly desired brownfield assets can be prohibitively expensive but greenfield assets will often carry unwanted construction risk.

“We have committed to exploring investment in infrastructure through Pip,” said Jacqueline Gillies, chief pensions officer for investments at the fund, who added that further details would be announced as the plan progressed.

The Pip has been established to help schemes achieve a rate of return of 2-5 per cent above the retail prices index over 25 years.

It also aims to mitigate the four main risks schemes face when investing in infrastructure, outlined in the box (right).

Schemes that are able to reduce these risks, while receiving inflation-linked returns, will have a better chance of paying out future pensions.

Strathclyde’s approach to infrastructure

At its most recent quarterly committee meeting, the £10bn Strathclyde Pension Fund agreed to commit between £100,000 and £250,000 to help set up the Pip.

The scheme also agreed in principle to invest up to £100m in the Pip as a “soft commitment”. Any firm allocation would be subject to further approval from the committee.

Strathclyde, which has 192,000 members, set up its New Opportunities portfolio in September 2009. This has a broad remit to invest in assets that do not fit in with the scheme’s overall investment structure.

Since then it has made six investments through this portfolio, totalling £60m. Five were £5m allocations to Scottish or Glasgow-based investment projects.

The remaining £35m was invested in City Legacy, a consortium of four Glasgow-based construction companies that will build the 2014 Commonwealth Games village.

The initial £100,000 Pip investment will go towards setting up the platform, which is designed to be a not-for-profit collaboration of between 10 and 12 schemes.

Pip structure

The Pip was the result of a memorandum of understanding between the Treasury, National Association of Pension Funds and Pension Protection Fund, signed late last year.

Strathclyde is effectively committing 1 per cent of its fund assets – that is a big allocation to just UK infrastructure

John Hastings, Hymans Robertson

The aim is to provide pension schemes with access to infrastructure assets, which will yield inflation-linked returns over 25 years.

The initiative hopes to attract £2bn of pension fund investment, which will double to £4bn through the use of leverage.

John Hastings, partner at Hymans Robertson, said the Pip was more suited to long-term pension scheme investors than private equity funds because it would hold and manage the assets rather than “acquire and flip” them for short-term profits.

The fund will be governed by the founding pension schemes – which are each expected to dedicate £100m – and run by an in-house or third-party management company.

The management company will identify, evaluate and bid for potential investments and manage the assets.

There will also be an investment committee and advisory committee, which will advise on, authorise and monitor the success of bids and investments.

But Hastings said the Pip may struggle to attract enough investors as very few were big enough to make the £100m required investment.

“Strathclyde, which is the biggest UK public sector scheme, is effectively committing 1 per cent of its fund assets,” he said. “That is a big allocation to just UK infrastructure.”

In April, schemeXpert.com reported on Leicestershire County Council Pension Fund which felt investing solely in UK infrastructure was too narrow and so allocated £70m to two global funds.

Overcoming four main risks

The Pip has been set up specifically to address the four main obstacles for pension schemes to invest in infrastructure:

  1. High fund management fees – the management company would be run on a not-for-profit basis and any incentives would be structured to be in line with the interests of the pension schemes. The schemes would also have bargaining power and so would be able to negotiate on costs.

  2. Lack of in-house expertise – investors would have access to the management team – whether third party or in-house.

  3. High levels of leverage reducing the inflation link – the fund would have a maximum leverage level of 50 per cent.

  4. Access to greenfield and brownfield projects – the in-house expertise would explore new approaches to dealing with greenfield construction risk and the collective buying power would make new brownfield opportunities available.

"Managing construction risk of greenfield projects has been a stumbling block for schemes investing in infrastructure," said Andrew Jones, managing director for infrastructure debt at AMP Capital.

He said this could be overcome if banks could be persuaded to take on the construction risk as long as pension schemes promised to buy the assets once they were built.

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