UK – Government must alter the procurement process for infrastructure projects so that it favours funds with a low level of leverage, the National Association of Pension Funds (NAPF) has said.
In a change that would clearly be advantageous for the organisation’s planned Pension Infrastructure Platform (PIP) – expected to leverage £2bn (€2.5bn) of initial capital to £4bn – the NAPF’s submission to the UK Treasury ahead of Wednesday’s Autumn Statement noted that the bidding process currently in place for infrastructure projects did “not place a favourable weighting towards more modest levels of leverage”.
“If long-term, low-risk, investors are to enter the market, we propose that the procurement process should be re-worked so as to award higher marks to a lower leveraged capital structure,” the submission said.
“Failure to do so would mean that investors such a pension funds would always be outbid by other, more high-levered investors who are effectively subsidised through the tax treatment of debt.”
The NAPF further raised concerns about the impact of the ongoing review of the IORP Directive on infrastructure investment, noting that, because it was unlisted, it incurred a 49% capital requirement.
The organisation added that it did not see the PIP’s potential investment targets as high risk simply because of their unlisted status, stressing that the platform would be “clearly positioned as part of pensions’ de-risking strategies”.
It said: “We note that the European Commission, as part of its forthcoming Green Paper on Long-term Investment (due in January 2013), has asked [the European Insurance and Occupational Pensions Authority] EIOPA to examine this part of the IORP review.
“We urge the government to continue to engage with the Commission and EIOPA on this issue, particularly as it relates to Europe’s 2020 growth agenda.”
In its submission, the NAPF also called for increased Gilt issuance by the Debt Management Office, as demand “remains very strong” in the wake of regulatory and accounting changes and suggested chancellor George Osborne should use the Autumn Statement – employed by the UK government as the pre-cursor to the Budget in March – to signal “a temporary uplift to discount rates”.
The NAPF had previously outlined a number of alternative discount rates in October.
The submission also urged the Department for Work & Pensions to issue its promised White Paper on state pension reform soon, giving the industry enough time to prepare for the end of contracting out – resulting from the end of the state second pension.
“Schemes will need sufficient time – five years post royal assent – to prepare for the ending of contracting-out, so we encourage the government to publish its White Paper as soon as possible,” it said.