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UK should launch infrastructure bond for pension funds – Rubenstein

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Pension funds should be able to finance UK infrastructure through a bond aimed solely at the industry and offering a yield above the prevailing market rate, Alan Rubenstein has suggested.

Speaking in a personal capacity, Rubenstein, chief executive of the Pension Protection Fund (PPF), suggested the pension bond as one way to support the defined benefit (DB) industry in the UK, with assets ringfenced into a sovereign wealth fund.

In a debate at the National Association of Pension Funds annual conference in Manchester, former pensions minister Steve Webb urged the industry to focus on the risk-sharing made possible by his defined ambition agenda, while Bill Galvin, chief executive of the Universities Superannuation Scheme, argued it was vital to be honest about the role played by trustees in tackling the DB challenge.

Rubenstein argued that the pension bond he proposed dealt with the industry’s hunt for yield but also helped the UK government in its attempts to secure financing for infrastructure projects.

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“My idea is that these bonds would be long term, say 30 years,” he said.

“They might be inflation-linked, or they could be fixed. But, crucially, they would pay a yield that is perhaps 1% above current – instead of 2.5%, in Gilts perhaps 3.5%.”

He argued they would only be sold to pension funds, with income ring-fenced to rebuild infrastructure.

“Frankly, if we can rebuild our schools, our roads, our hospitals at this kind of rate, we will be getting a good deal,” he said.

“If [chancellor of the Exchequer] George Osborne really wants £20bn (€27bn) quickly for infrastructure, this would be the way to do it.”

Rubenstein argued that it would help address the problem of pension scheme underfunding and held out the possibility that if deficits improved markedly, it could spell the end of the PPF levy, set at £615m for 2016-17.

“I’m asking you to support pension bonds, build a better Britain and save DB pensions,” he said as he concluded his presentation.

Webb struck a note of caution, however, questioning whether Rubenstein’s argument that the pension bond was in the interest of inter-generational solidarity rang true.

In a good-humoured rebuttal that eventually saw Webb’s call for collective defined contribution voted the best proposal by the audience – 56.6% to Rubenstein’s 43.4% – the former MP noted that the debt incurred through the bond would need to be paid off by future generations, at a higher rate than the UK currently borrows.

Webb hypothesised how a conversation on the proposed pension bonds would occur in the Treasury.

“I don’t think I could go the chancellor and say ‘You know you can borrow at next to nothing at the moment, do you like to pay more for your borrowing for infrastructure?’” he said.

“I don’t think I’d even get through the door. It’s a lovely idea, but it won’t happen.”

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