IRELAND – Irish pension funds should consider launching a jointly owned infrastructure investment manager, the OECD has suggested – arguing the government must aid investment by offering commercially viable projects.
Noting how the country's pension funds were seeking ways to diversify investments in the wake of low overseas sovereign yields and the return on Irish equity following the financial crisis, the OECD said in its report of the country's pension system that investment in domestic infrastructure projects could pose "serious challenges".
"The size of infrastructure projects, the policy and revenue risks involved and the technical skills required in managing infrastructure project investments make them particularly challenging for pension funds, particularly small and medium-sized ones," the report said.
The OECD called for an "attractive pipeline of projects", backed by a "clear" framework that could facilitate domestic investment in infrastructure – while stressing that any way of financing such projects needed to be compatible with the tendency of pension funds to de-risk, suggesting that infrastructure bonds could be backed by the European Investment Bank.
"Another investment option may be indirect equity control of infrastructure projects channelled via a manager jointly owned by a group of pension funds, similar to the Industry Funds Management in Australia or the UK infrastructure platform," the report said.
The AUD40bn (€31.3bn) Industry Funds Management is jointly owned by 30 of the country's largest superannuation funds, including the AUD46bn AustralianSuper, while the UK's National Association of Pension Funds and the Pension Protection Fund have been working on the launch of an infrastructure fund, recently attracting £1bn worth of seed capital.
Jerry Moriarty, chief executive of the Irish Association of Pension Funds, told IPE he would not rule out such a venture, but insisted that any investment would need to "stand up in its own right" as a viable investment.
Moriarty said the association had discussed the possibility of an infrastructure venture with its Department of Finance over the last couple of years, but that commercial viability of any investment remained key.
"The difficulty has been, for one, getting greater detail around what the department has in mind, but also trying to get across that this is something pension schemes need to justify as a standalone investment," he said.
"The fact it's good for the country isn't enough on its own – it needs to be a lot more than that."
He also questioned whether Irish funds would have the capacity to undertake such a venture, both due to the smaller pool of assets available and the smaller number of staff employed.
The OECD noted that political pressure was "mounting" for local funds to invest in infrastructure.
"This is symptomatic of a growing encroachment of government objectives in the management of private pension assets," the report said.
It added that while supporting domestic growth was a valuable goal, it should not be used to impose low returns on pension funds – and warned against a too widespread use of subsidies to encourage investment.
"A general subsidy to all infrastructure projects, as entailed by the proposal to lift the pensions levy on such investments," the report said, referencing calls from union SIPTU, "would distort capital allocation and potentially cause an inefficient allocation to wasteful projects."
The report also insisted that it was important to ensure the minimum funding standard did not discourage investment in infrastructure.
The Pensions Board has said it had a "very strong understanding" infrastructure bonds would soon be regarded as matching assets – allowing funds to use them to offset risk-reserve requirements upon its introduction.
Minister for finance Michael Noonan earlier this year said his department was "exploring financing mechanisms to facilitate private pension funds' investment" in a €2.25bn stimulus package involving Public Private Partnerships for school, hospital and road construction.