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UK Treasury calls for 'stronger role' in infrastructure for pension funds

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UK - Pension funds must play a stronger role in funding infrastructure projects, the UK's chancellor of the exchequer urged as he announced a review of Private Finance Initiatives (PFI) to rebalance the risk and rewards facing private sector investors.

George Osborne's call, which follows months of speculation that the government would seek to increase infrastructure investment to help boost Britain's economy, was welcomed by the National Association of Pension Funds (NAPF), which said the asset was a suitable liability match for schemes in absence of "sufficient" gilt issuances by the Debt Management Office.

Speaking in the House of Commons, Osborne said the Treasury would next month launch a consultation on the future shape of PFI, following a number of changes to the initiative over the past 18 months.

He added that this reform would be the next in a series of steps "to improve the cost effectiveness and transparency of PFI".

"The government will expect a new delivery model to draw on private sector innovation, but at a lower cost to the taxpayer, offering better value for our investment in public services," Osborne said.

The chancellor added that the new model would allow for access to "a wider range of financing sources", including encouraging a "stronger role to be played by pension fund investment".

Joanne Segars, chief executive of the NAPF, said infrastructure served as a "good fit" with schemes liabilities, especially in the absence of a sufficient number of UK gilts.

She added: "Fresh thinking around how best to match pension funds with infrastructure projects is welcome and should be developed."

The Confederation of British Industry also came out in favour of the proposals.

However, Neil Bentley, the organisation's deputy director general, called for transparency on goals, saying: "The government must also publish a clear, long-term pipeline of projects to boost investor confidence."

Philip Brown, partner in Hogan Lovells' infrastructure and project finance team, noted that the Treasury would only be able to encourage pension funds to consider the asset.

"It's absolutely right that the government can't strong-arm pension funds into making investments - but to indicate an enthusiasm for it and see if pension funds react to that, as they have been over the past five years - has got to be seen as interesting," he told IPE.

Andrew Bradshaw, partner at Sackers, meanwhile indicated that changes to investment regulations might be needed to allow for large amounts of exposure - with numerous sources citing the need for pension funds to address a £50bn (€58.5bn) funding shortfall not met by government.

Bradshaw said encouraging both local government pension schemes (LGPS) and those in the public sector would likely require new regulation - with trustees faced with the conflict of investing in a member's best interest, if this could not be said to be gained from infrastructure.

"There are things you could do to help trustees," he told IPE. "By changing the legislation, you could make clear they don't have to worry too much about diversification."

He said that, in terms of LGPS, changes to investment regulation "repeatedly kicked into the long grass" could be used to allow for a higher exposure.

Bradshaw added that, even without new legislation, the argument could be made that local authority schemes should choose to invest in local infrastructure, as it benefits its members and inhabitants in the local authority, rather than hedge funds based in foreign jurisdictions.

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