Several local authority pension funds are considering increasing their investments in UK infrastructure in response to a Treasury plan to underwrite risks, according to interviews by LGC’s sister title Construction News.
Earlier this month the Treasury announced its UK Guarantees scheme, which could guarantee risk on an estimated 230 infrastructure projects, addressing some of the major obstacles to pension fund investment. However, other obstacles such as high fees and a lack of experience in infrastructure would remain.
The new scheme follows chancellor George Osborne’s announcement eight months ago of a ‘memorandum of understanding’ with UK pension funds, which he said could generate £20bn of new investment in UK infrastructure.
That agreement has so far resulted in a plan by the National Association of Pension Funds and the Pension Protection Fund to launch a £2bn pension infrastructure platform, which can pool the smaller funds by January 2013.
Construction News asked local authorities, pension funds and industry experts what they thought about the plans. Below are some of their comments:
Strathclyde Pension Fund (a founding member of the Pension Infrastructure Platform); includes local authorities in west central Scotland and worth about £11bn.
Richard McIndoe, head of pensions, said: “There is a clear intention to participate in the platform and that would be a very significant investment likely to be £100 million.
“We do not at present invest in infrastructure but this is not a change of policy. We have a new opportunities fund which allows us to do things that are new without them being a change of strategic direction. At this stage this is a new opportunity, not a new strategy. Given the general interest in infrastructure it could become a new strategic direction sooner rather than later but I really don’t know at the moment.
“The platform looks attractive because it is a group of pension funds doing something for themselves, potentially with less intermediary costs.
“It’s clear there is a need for more infrastructure, and that we want to make good investments, and there should be some common ground between those two objectives though it is not always easy to find.
“Removing the construction risk from projects would nudge things along.”
Greater Manchester Pension Fund, worth about £10bn.
Peter Morris, executive director, said: “I have asked staff to investigate how this guarantee works but have not yet had that back.
“If it reduces the risk elements then all else being equal clearly it makes this investment a little more attractive.
“We are just generally increasing our investment in infrastructure as part of a long-term plan to diversify our investment opportunities a bit more.
“We have been investing in infrastructure quite a long time but it takes time to prove the case for any asset class. Generally we would build a commitment by investing relatively small amounts over a long period.”
West Yorkshire Pension Fund, a pension fund for five councils and another 250 organisations. Worth about £7.9bn.
Ian Greenwood, spokesman, said: “Our trustees would look at investment proposals not on whether they would be good for the local economy, though it’s a bonus if they are, but on whether something is a good investment.
“You would not want to invest only in the local economy because that increases risk, suppose there were a sudden downturn in one place, risk would increase so we would not invest in infrastructure for a political purpose.
“If we invest in Malaysian dams or whatever there is no reason why we couldn’t put together a vehicle to invest in infrastructure here.
“If we did it might be something that mirrors a private equity fund that can invest in infrastructure over 15-25 years. You are locking your money away for a higher return and a pension fund does not need all its money at once so that can make sense, and you get some pretty good returns from infrastructure.
“You always need diversity in a pension fund’s investments so it’s a mixture of infrastructure, equities, bonds and other things. In principle though you see a significant but not massive part of our fund go into infrastructure.”
Steve Dainty, pensions manager, said: “This has certainly crossed our radar but no decision has been taken yet and we do not at present exist in infrastructure.
“If we did so we would probably use an investment manager to do it rather than do it directly.
“We have to earn the best rate of return for our investors and we get people saying the Northamptonshire fund should invest in Northamptonshire infrastructure. As a pension fund manager I don’t like that as there is an immediate conflict of interest.”
National Association of Pension Funds,
which represents 1,200 British funds holding around £800 billion in assets
Joanne Segars, chief executive: “The promise of a government backstop will help give investors more confidence when it comes to funding big infrastructure projects. This guarantee should also strengthen the growing interest among pension funds in the infrastructure investment platform we are working on with the PPF.”
Ms Segars said her members are hoping to see “a lot more detail” in September or October and that “hopefully there is an army of civil servants working on that as we speak”.
“It’s important that we do see that soon,” she said.
“If there are particular projects where the only thing that’s stopping the shovels hitting the ground is the absence of a guarantee, these assets can become attractive to pension funds.”
Pension Protection Fund, with 12 million schemes and £6bn portfolio
Alan Rubenstein, chief executive: This should give investors, including pension funds, the confidence to provide the financial support that such projects need.
“The announcement should also provide further encouragement to pension fund investors to support the Pensions Investment Platform, which both our organisations are working hard to establish.”
Chartered Institute of Public Finance and Accountancy pensions panel
Nigel Keogh, secretary: “A lot of detail of this is still unknown but it would appear a step in the right direction.
“One of the concerns [when deciding on investment] is the construction risk and if that is taken out of the equation it would be more likely to be attractive.
“From people I’ve spoken to infrastructure investment by pension funds tends to be a secondary investment in existing projects rather than in construction, something that gives a bond-like return rather than a higher return for more risk [such as new construction].
“Anything that takes risk out makes it more attractive.
“The other question is scale, whether pension funds can come together to have a significant pot of money, which makes the NAPF work on infrastructure interesting. I’ve no idea though how attractive pensions funds would find that, it depends on their individual investment strategies.”