Pension funds across the world face a wide range of issues when it comes to investing in infrastructure, but for some, political risk and lack of supply are the biggest barriers.
With its ability to provide inflation-linked income streams, infrastructure is a popular asset class in a time of increasing longevity. However, competition with large overseas schemes has sometimes limited UK funds’ ability to access domestic opportunities.
A lot of the time there’s a bit of a gap between what pension funds want and what governments want
Mike Weston, PiP
Infra issues for UK schemes
Speaking at the Sixth Annual World Pensions & Investments Forum in London on Thursday, Mike Weston, chief executive at the Pensions Infrastructure Platform, said: “One of the reasons I think that the UK is such an interesting market for infrastructure investment is the confidence overseas investors have in the stability of our regulatory and political regime.”
He said there is a lot of dialogue with the UK government about the type of projects it wants pension schemes to fund, however, "a lot of the time there’s a bit of a gap between what pension funds want and what governments want”.
Pilkington and EAPF increase infra for long-term returns
In the hunt for yield, the Pilkington Superannuation Scheme has decided to increase its exposure to infrastructure, as investors, including the Environment Agency Pension Fund, continue to seek diversification and return by allocating to this asset class.
For Weston the real barrier is whether there are enough infrastructure projects that fit the type of risk profile that suits schemes.
Interest in UK assets from overseas also creates competition for assets, which means pricing could become unattractive for UK investors, he suggested.
“Without pointing any fingers… there are a number of overseas territories that maybe take a different view on returns”, he said, and therefore the pricing that schemes see in competitive situations for assets can mean “that it’s not something we could ever get comfortable with”.
Regulatory risks
Stephan Rupert, senior director infrastructure investments at Canada's Public Sector Pension Investment Board, agreed that “yields are incredibly low”.
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Unleveraged infrastructure is a growing part of Centrica Pension Scheme’s portfolio as the fund seeks to access long-term, stable cash flows, but others warn about the regulatory risk associated with the asset class.
He also highlighted the political and regulatory risk of investing in infrastructure, explaining that a certain deal may go well for five or 10 years, but then be affected by an unexpected regulatory issue throwing a spanner in the works.
Consequently, “it is an easy thing for investment managers to not price because it’s not going to come right away. When it does come, it’s going to be a surprise,” he said.
Federico Merola, chief executive of Arpinge, Italy’s national pension infrastructure investment platform, noted that in some sectors there is a lack of industrial companies confident enough to work with pension fund investors.
This can mean investors have to take things into their own hands. “We have to become sponsors and promoters, and therefore we have to start building up projects with proper governance with no conflict of interests,” said Merola.
