The Pensions Infrastructure Platform has called on the government to make UK infrastructure more appealing to investors, in an effort to address the mismatch between government hopes for infrastructure investment and schemes’ need for returns.
Pension schemes have become increasingly interested in infrastructure and other real assets as low interest rates have forced them to move away from gilts in search of yield.
If the government want to ensure they’ve got those investments coming in they need to talk about backstopping losses
Guy Hopgood, JLT Employee Benefits
Last October, chancellor George Osborne announced measures to improve infrastructure planning and funding in the UK. This included establishing a National Infrastructure Commission and pooling all 89 Local Government Pension Scheme funds into six ‘British Wealth Funds’ that can then “develop the expertise to invest in infrastructure”.
However, most pension schemes are interested in established, brownfield projects that provide steady income rather than new greenfield projects for which they have to shoulder some of the construction risk.
The NIC has been consulting on the UK’s infrastructure needs, as well as the governance, operation and structure of the commission itself. The consultation closed last week.
In a statement released by the PiP, Mike Weston, chief executive, said success will lie in whether it can encourage government and the market to provide a long-term pipeline of the “right kind” of infrastructure assets and ensure their structure is attractive to schemes.
“A system which clearly identifies the UK’s infrastructure needs and creates confidence that those needs will be swiftly prioritised and acted upon will find plenty of UK pension scheme capital,” he said.
Guy Hopgood, head of alternatives research at consultancy JLT Employee Benefits, said there is a “disconnect” in the aims of government and pension schemes for infrastructure.
“If you had the right deals schemes would invest,” he said. “I believe ultimately it comes down to supply and demand.”
Government protection
Hopgood said schemes should be offered infrastructure investment protection. “If the government want to ensure they’ve got those investments coming in, they need to talk about backstopping losses,” he said.
However, David Hickey, managing director at fiduciary manager SEI’s institutional group, said measures such as covering a portion of losses should be approached with caution, as the risk could end up being borne by the taxpayer.
He added it could still work but “it would have to be where the government is still materially involved in the project”.
Hickey said demand for infrastructure investments among pension schemes is high. “Schemes are now aware of what this asset class is and want to invest in it, but are struggling to invest as much as they’d like to.”
Kevin Frisby, partner at consultancy LCP, said while schemes are interested in infrastructure, they are reticent to focus on the UK.
“They would prefer to go with a manager who is global,” he said. “Many trustees have said that is a worry for them if you go to a fund manager [and] they want to put all their eggs in one basket.”
