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GLOBAL - Pension funds are becoming increasingly attracted to investing in infrastructure but governments should do more to encourage them, according to the latest report published by the Organisation for Economic Co-operation and Development (OECD).

More pension funds are considering investing in the asset class because infrastructure has the potential to protect pension funds against market volatility, inflation and interest rate risks while the socially-responsible investment characteristics of infrastructure are also encouraging, according to an OECD report entitled Pension fund investment in infrastructure and produced by independent consultant Georg Inderst.

Infrastructure's long-term, stable income streams, along with relatively low default rates and the potential to provide diversification within portfolios are also attracting pension funds' interest, he suggested.

The California Public Employees' Retirement System (CalPERS), for example, adopted a new investment policy in 2008 that targeted 3% of its allocation ($7.2bn) for infrastructure. ABP, the €300bn Dutch pension fund, is also targeting 2% (€6bn) for infrastructure through its Strategic Investment Plan 2007-2009.

Other European pension funds invested in or considering infrastructure include the Netherlands' PFZW, Danish funds ATP and PKA, Finnish VER and British BT.

Some pension funds have even allocated a percentage towards infrastructure investments in their countries' pension reserve plans, such as the Canadian Pension Plan (CPP) or Swedish AP3.

The Irish National Pension Reserve Fund (NPRF) also announced in 2008 it wanted to invest €200m, or 1%, in domestic public sector infrastructure projects.

This all comes as the OECD also predicts the annual infrastructure requirement for electricity transmission and distribution, transport, telecommunications and water will average 3% of world GDP by 2030, or USD $50trn (€39trn), while there will be a larger requirement for better infrastructure, especially in developing countries.

Inderst's report predicted a 3% allocation of pension fund assets would generate approximately $500bn for infrastructure investments.

Analysts are still unsure, however, what the risk return profile or benchmarks are for infrastructure and expect returns to fall to single digits as a result of the financial crisis, which is making some pension funds cautious about investing in the asset class.

According to the report, exposure to leverage, environmental risks, political challenges and legal and ownership issues are also making pension funds wary.

Governments wishing to help infrastructure developers raise capital from pension funds should offer a stable institutional and regulatory environment for infrastructure investing, the OECD claimed, and decide on the use of potential private sector involvement.

The report recommended governments secure public and institutional support and promote transparency and contractual arrangements to ensure the co-operation between public and private sectors.

Other suggestions within the document were the establishment of international guidelines for performance and risk management of infrastructure investments, along with improved independent data collection and more advanced risk analysis of infrastructure.

Many pension funds invest primarily through infrastructure funds, however larger Australian, Canadian and Dutch funds tend to invest more directly or via private-equity funds at present.

Inderst said there is often confusion about the labelling of infrastructure with asset allocation, as pension funds classify infrastructure investments under various titles including private equity, real estate, alternatives, real assets of "other assets."

When being defined by its physical characteristics infrastructure can be split up into economic infrastructure, which includes transport, utilities, communication and energy, and social infrastructure such as education, health or security facilities.

In contrast, the report also noted financial industry analysts tend to define infrastructure by economic characteristics, including long-duration, low operating costs and high target operating margins, high barriers of entry or regulation.

If you have any comments you would like to add to this or any other story, contact Poppy Sketchley on + 44 (0)20 7261 4629 or email poppy.sketchley@ipe.com

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