Talking Head: Infrastructure assets offer a strong alternative to index-linked gilts but pension funds need more encouragement from the top, says PIP's Mike Weston.
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
