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OECD report cites 'serious barriers' to long-term investment

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Serious barriers to long-term investment do seem to exist, and governments around the world need to do something to remove them, the Organisation for Economic Cooperation and Development (OECD) has warned.

Data in the latest OECD report on pension funds’ long-term investments clearly show evidence the pension fund managers have a strong interest in long-term investment, the organisation said.

But the level of such investment is still low and on average stable, it said.

The report surveyed 86 large pension funds and public pension reserve funds in more than 35 countries, managing nearly $10trn (€7.3trn) in all – more than one-third of total assets held by this type of investor worldwide.

The average allocation to alternatives increased between 2010 and 2012 to 15.6% of total portfolios from 14.4%, while exposure to fixed income and cash rose to 56.1% from 53.4%. Equities allocations fell on average to 28.3% from 32.2%, according to the report.

As a proportion of total assets under management for the complete survey, infrastructure investment in the form of unlisted equity and debt was just 0.9% or $72.1bn in 2012, the OECD said.

The report said: “This year’s survey yet again reveals a low level of investment in infrastructure on average among the surveyed funds, despite evidence of a growing interest by pension fund managers.

“This seems to confirm the importance of barriers and disincentives that limit such investments and the relevance and need for policymakers to address them.”

One barrier to long-term investment is the lack of clear definitions, it said.

Although pension funds do have data on their long-term investment – and infrastructure investment in particular – methodologies and definitions used to classify such investments differ, making comparisons difficult, the OECD said.

“There is clearly a need to standardise definitions and classifications to facilitate international monitoring of long-term investment,” it said in its report.

These definitions are vital not only for investors but also for regulators and other policymakers to develop appropriate regulation, it said.

The absence of objective, high-quality data on infrastructure investments makes it hard for investors to assess investment risks and understand correlations with the returns of other assets, it said.

The OECD also underlined the need for pooled infrastructure investment vehicles for smaller institutional investors.

It said its set of high-level principles for long-term investment, which G20 leaders endorsed at last month’s St Petersburg summit, give several directions on facilitating such investment.

Further work will identify effective approaches to take, it said.

Governments have already taken some steps to tackle some of the problems, the report noted.

The UK government has a policy to attract £20bn (€24bn) of institutional investment into infrastructure and has been talking to investors, while at the EU level, the ‘Project Bonds Initiative’ approved in May 2012 aims to finance infrastructure projects in Europe using the capital markets.

And recent G20 meetings have recognised the urgent need to deepen and broaden capital markets so developing countries can use their own financial resources and attract capital from abroad, the OECD said.

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