UK: A marriage yet to be made
Infrastructure is seen as an asset class that offers a good match for pension fund liabilities. Pádraig Floyd outlines the progress to date of the UK Pension Infrastructure Platform
Infrastructure investment has long been touted as a natural step for pension funds faced with long-term liabilities. But take-up has been minimal among UK pension funds because they feel the deck has been stacked against them. For years, the infrastructure products offered by the managers have largely not suited investors.
“We’re all looking for long-term UK inflation-linked cashflows,” says Keith Shepherd, chief investment officer of RPMI, the UK railway industry fund, which is a participant in the UK’s Pension Infrastructure Platform (PIP) initiative. “That sounds simple and everyone is saying that infrastructure is a no-brainer, but you’ve got to find the projects and that has been much more difficult that you might think due to misalignment of timing, misalignment of fees and of objectives.”
The PIP aims to give pension funds the chance to define the product they want rather than going to the market and asking for the best fit.
“We want to develop a new fee structure so we are not encouraging private equity men to come in. What is important for us is long-term inflation-linked cash flows,” Shepherd adds.
What schemes want
Much infrastructure investment has looked far more like private equity and has been managed on a “buy it, hold it, flip it” basis, to use the words of Alan Rubenstein, the chief executive of the Pension Protection Fund. This has left pension scheme investors feeling unloved and offered them little encouragement to engage with the asset class.
Past experience with infrastructure is also one reason why the National Association of Pension Funds (NAPF) has been involved in the PIP project to open up the asset class to as wide a community as possible.
Ian Peart, senior investment consultant at Buck Global Investment Advisors, is broadly supportive: “The first thing infrastructure can and does provide is some very good key characteristics of long duration, stable cashflows. There are risks, of course, such as the illiquidity premium, but anything that gives access to a class at lower management fees is good, but the devil will be in the detail.”
That detail is being thrashed out now, in a series of regular meetings, according to Shepherd, with the management structure taking shape and the legal entity – PIP Limited – has been created.
“We’re going through the process of refining our objectives and some broad statements have been made,” Shepherd adds. “The investment process is ongoing as at every stage we take you need to add more detail to it.”
So far, parameters around primary versus secondary infrastructure, UK versus overseas and the degrees of leverage and degrees of index-linking have been broadly agreed, Shepherd continues, but much more discussion has yet to take place before anything is agreed in detail.
Mike Taylor, chief executive of the London Pension Fund Authority says the broad objectives have not changed and remain: “UK focused investments targeting RPI plus 2% to 5%. It will be mainly brownfield and PPP and is predominantly UK, low-fee, targeting long-term stable inflation linked cashflows.”
As in any waiting period, rumour circulates. Some say PIP is not as far advanced as might be expected, given that the tender for potential managers went out in May. Others say it has stalled and little is likely to be achieved this side of Christmas.
But Joanne Segars, chief executive of the National Association of Pension Funds, refutes any such suggestion, arguing there is a huge amount of work currently being undertaken, particularly around manager selection. “We have not been short of responses, but we’ve a lot of work to get through as the manager selection is a critical part of what we do,” she comments.
Segars is unapologetic for taking time over the arrangements, but says the PIP must be convinced managers can deliver what they claim. “I’m aware a lot of public scrutiny on this and need to make sure success of the investments will build future success,” she says. The drafting of legal agreements is also under way, which is “tedious, but very important for putting in place all the legal structures”.
What will it look like?
PIP is a limited partnership for which NAPF is – currently at least – the parent company. This is merely to expedite the formation of PIP; Segars is at pains to emphasise that it is not a profit centre for the organisation and PIP will be run on a not-for-profit basis for its members.
Under the planned structure, each founding participant will be a limited partner (LP), alongside the NAPF, and the organisation itself will act as a general partner (GP). How that general partner will be structured, Segars cannot yet confirm, so it could be an in-house team recruited for the purpose of running PIP or even an appointed third party. Once this is decided, additional key personnel will be recruited to support PIP.
“We are honing the structure, but we are very keen to do proper governance oversight of PIP and the managers,” says Segars. This is because one of the most frustrating aspects of the current infrastructure market is the misalignment of interest between managers and pensions funds as investors, she explains.
“Normally, the GP is sat within the managers and we want to separate that out so the GP will have that governance, that oversight we require.”
The GP will have a major role in reporting to the limited partners and any other schemes which enter PIP at a later date. It will have responsibility for all the legal reporting and governance for the limited partners.
Another of the many big jobs left to be tackled is the recruitment of a chief executive of the GP.
“How we finalise the structure will depend on how many people sit within the GP, but the chief exec in our current thinking will be within the GP,” adds Segars.
The lack of detail is frustrating some advisers. Buck’s Peart welcomes PIP and believes it will offer diversification of client assets, but he has concerns about the stated aims of PIP to engage in infrastructure equity while hiving off some of the construction risk.
“Reforms such as Basel III and Solvency II for insurance companies will have an impact in this area,” he says. “The banks are deleveraging and reducing their loan books. So while that may offer some opportunities in the loan market youneed to be careful what you buy.”
However, he says PIP has been the catalyst for schemes reviewing the role of infrastructure in their portfolios.
This view is shared by Nick Spencer, director of client strategy and research at Russell Investments: “A lot of pension funds are engaged and are looking at it to determine how they put it into their portfolios,” he says. Spencer sees an opportunity for PIP in time to provide access to open- ended, tradable debt funds that will be suitable for defined contribution investors and welcomes that potential.
So, PIP is growing, albeit slowly, but Segars – and the founding partners – are confident it will launch within the next couple of months. There won’t be a big bang, but then all the schemes will have to go back to their trustees to make sure they are satisfied with PIP’s governance.
Segars has been encouraged by the level of interest from other schemes, but doesn’t think that anyone will be crushed in a stampede once PIP is open for business. “This is the public calm before the storm,” she concludes.