The UK chancellor, George Osborne, last year announced plans to attract £20bn (€23bn) of pension fund assets into infrastructure projects, backed by the National Association of Pension Funds (NAPF) and the Pension Protection Fund (PPF).
However, while supported by the £11bn Greater Manchester Pension Fund and the £4.3bn London Pensions Fund Authority signing a separate memorandum of understanding with the Treasury to promote the initiative, commentators remain unsure about its success.
Discussing the National Infrastructure Plan 2011, Aon Hewitt’s global head of asset allocation, Colin Robertson, noted that many of the projects put forward for investment were more similar to venture capital projects, rather than more straightforward gilt investments. He said that while some local authority schemes, would be able to invest for the long-term, they would nonetheless have to consider what is best for scheme members.
“They will need to take account of the illiquid nature of infrastructure and carefully assess the financial terms of the government’s proposed investments,” Robertson said. “Also, while typical pension fund infrastructure investments are in ‘secondary infrastructure’, which have become cash generating and are similar to gilts, the infrastructure projects put forward are ‘primary infrastructure’, which is more like venture capital.”
While the Treasury concedes this is indeed a problem, it offers no solution aside from highlighting the agreements with pension funds, as well as a separate agreement with the Association of British Insurers (ABI) to develop vehicles for investment.
Interest is likely to be held back by this lack of detail, with an NAPF spokesman unable to shed any light on the shape of the proposed investment platform prior to Osborne’s speech in the House of Commons and little additional information contained in the 200-page plan.
However, ABI’s director general, Otto Thoresen offered more concrete proposals, suggesting the government develop a new class of infrastructure bonds and target the income at projects such as railways and hospitals.
The problem facing the chancellor’s ambitious project is of scale. While commentators have long lamented that some overseas funds, especially Canadian and Australian ones, shop around globally and buy objects wholesale, with very few exceptions no UK fund would be able to find the cash to buy High Speed 1 for £2.1bn - the rail link comprising the UK side of the Eurostar that was bought jointly by Ontario Municipal Employees Retirement System (OMERS) and Ontario Teachers’ Pension Plan (OTPP) in 2010.
The political motivation for such projects is understandable. PFIs, themselves subject to unspecified reforms in the near future, can be kept off the national balance sheet and therefore allow the government to increase spending while at the same time still being seen to tackle the deficit.
Aside from the political implications of the plan, can pension funds, in a low-risk way, be seen to contribute to the country?
Irish unions have been calling for the country’s funds to aid failing and underfunded infrastructure projects. And last December the £11.1bn Strathclyde Pension Fund launched a £100m local small and medium enterprises (SME) investment fund, in addition to its exposure to the devolved government’s Scottish Loan Fund.
No doubt pension fund would like to assist their home countries in a time of need, but the responsibility for making this happen lies with the Treasury, aided by the NAPF and AIB, which must create vehicles safe enough so that schemes can justify shifting substantial assets into these new projects. With only around 2% of all assets in infrastructure presently, many schemes would have to significantly alter their investment strategy to create the initial £20bn investment.