Infrastructure is the asset class hotly tipped as austerity budgets bites, writes Jonathan Williams. But can Ireland's industry be attracted to an illiquid asset at a time when funding concerns are paramount?

Facing low returns from a volatile markets, Ireland's pension funds could be forgiven for flocking to an asset deemed safer and offering defensive qualities. Yet, so far, infrastructure - with its returns potentially more closely aligned with liabilities than other asset classes - has not seen the growing interest many within both the asset management industry and government machine would like, with one industry veteran admitting many have "little or no" allocation to it.

Indeed, calls for pension funds to invest have not only been coming from those two sources - with the asset management industry recognising an opportunity as austerity-plagued governments are forced to slash development budgets and sell off assets - but also from unions eager to see the economic boost.

At a time when the pensions levy is causing great discomfort for the country's industry, Jack O'Connor, general president of the SIPTU trade union, has been outspoken that schemes should be exempt from the tax if they allocate assets to domestic projects.

The union president was unsuccessful with his initial proposal for an exemption if pension funds allocate 5% to infrastructure, which he estimated would channel €4bn in assets towards projects. He told IPE he had not given up on the idea to offer institutional investors a better incentive.

O'Connor also said the initial proposal failed to garner support in government circles as the treasury would have to forego the €470m raised annually. As pension funds were not subject to the "immediate" demands of a state's budget, he instead suggested that schemes could be offered a rebate on any levy payments once its infrastructure investment had paid off, creating jobs.

However, he goes further, saying that as the new funding standard has yet to be announced, infrastructure exposure should be incentivised in that. "If there was a way our pensions regulator could be persuaded to recognise that the funds would be getting the exemption, they could factor it in to the calculation of the assets for their solvency valuation."

Growing support for increased allocation to Ireland's troubled economy is not surprising. As Philip Shier, senior actuary at Aon Hewitt notes, this exposure could previously be found through institutional investment in the finance sector. However, in the wake of the financial crisis, the value of these holdings have approached zero.

"There is support from a political perspective and certainly the trade unions are vocal about it," says Shier, who is also a member of the European Insurance and Occupational Pension Association's stakeholder group. "Why not require direct sovereign [investment] or in some way encourage trustees to, as we say here, ‘put on a green jersey' and invest some money domestically?"

For its part, the government is keen to be proactive, having been forced to cut several key infrastructure developments such as Dublin's metro. Minister Brian Howlin, responsible for the portfolio of public expenditure and reform, told the Dáil that there had been "extensive" discussions with pension funds, as well as the European Investment Bank.

In fact, Shier notes that the minister for finance Michael Noonan, as part of December's two-day austerity budget, announced that 2012 would see renewed discussions with the pensions industry on how to invest domestically. "That, I think, was inserted in his speech at the last minute - so there has obviously been some recognition of the lobbying in favour of it."

He concedes that the next step is to guarantee trustees a certain amount of comfort, developing a suitable structure that suits pension fund trustees. "We would have to see what is proposed. As an idea, I have nothing against it, but it would have to be in such a way that it would meet the requirements of pension funding - which is to provide secure funding for all beneficiaries," says Anne Maher, independent trustee and former chief executive of the Pensions Board.

O'Connor believes that project bonds could be one option, with the state companies involved issuing them on a case-by-case basis.

Patrick Burke, director of investment development of Irish Life Investment Management - which recently attracted €250m from the National Pensions Reserve Fund for its Irish Infrastructure Trust - is more upbeat and, while conceding that most funds currently have "little or no" exposure, says it will be a growth area.

He says this will be a natural result of de-risking, as funds move away from equity. "In doing so, they will find that infrastructure is an attractive investment for a proportion of their fund - I'm not talking about anything much above 5%, but they might find it an attractive option as part of their asset diversification, if the returns support their funding proposal."

It is too early to say if funds will rise to the occasion and invest, but with the privatisation of state-owned utilities likely, as well as transport projects reliant on outside funding, institutional investors will have a number of options.