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November 23, 2011 9:34 pm
George Osborne wants to unleash private sector investment in Britain’s infrastructure to help underpin long-term growth. As he prepares for next week’s autumn statement, he has turned to Birmingham Airport as an inspiration for what he hopes to achieve.
The public/private partership is a telling example of the different approaches taken by pension funds in the UK and overseas. Two public sector pension funds together hold a 48 per cent stake in the airport but neither is British. They are the Victoria Fund Management Corporation, which represents the Australian state’s municipal workers, and the Ontario Teachers Pension Plan from Canada.
Now the government is looking for ways to tap into the trillions of pounds held in the UK’s pension funds and channel it into upgrading the nation’s roads, railways, energy networks, housing and other schemes.
Infrastructure assets are uniquely suited to pension schemes which seek assets that do not behave like equities and will pay secure long-dated, inflation-linked incomes to match their outgoings – that is, long-dated, inflation-linked promises to pensioners.
The UK’s investment industry is not averse in principle to backing infrastructure projects. Tim Breedon, chief executive of Legal & General insurers, said: “If we could have put something like it in place two years ago, we would have had a balanced plan-A – something to stimulate business confidence and capital investment in the private sector to combat the deleveraging of the banking sector.”
The National Association of Pension Funds points out that private sector retirement schemes are hungry for long-term, stable investments to match their liabilities.
But the pension fund industry feels it is still a long way from finding a means of investing in infrastructure in a way that meets these needs at an attractive price. The trustees who make the asset allocation decisions still have a fiduciary duty to ensure that pensioners’ money earns commercial returns.
Consultants meanwhile point out that the Australian superannuation funds, Canadian pension funds, and Benelux funds that have led the way in investing in infrastructure projects have many more billions to invest than UK single company pension funds and it will be hard to persuade pension fund trustees in the UK to allocate substantial portions of a portfolio into a complex non-traditional asset class which has a short-track record and in which they have little expertise.
For while early investors benefitted from a positive environment of low interest rates, low inflation and economic growth and earned returns of between 10 and 15 per cent a year, a rush of money into the asset class between 2005 and 2007 drove the price of infrastructure assets up, reducing prospective yields.
“Returns have become much more... mixed”, says Amarik Ubhi, Mercer’s leader of infrastructure research.
Above all, says Mr Ubhi, funds “want to know the risks won’t change in five years given the illiquid nature of the asset class. They want certainty from a political and regulatory perspective”.
The government has talked to local authority pension funds, which have about £100bn under management, about setting up a collective investment scheme that could be managed nationally. But the NAPF says the discussions are “broad” in range “and these talks are still at an early stage.”
Meanwhile, some investment executives are sceptical about the government’s commitment.
Tim Breedon, chief executive of Legal & General, says: “It is not about the supply and demand of funds as much as it is a problem of coordination. These factors probably explain more than price why a distinct asset class called infrastructure has not been created in the UK.”
Additional reporting by Norma Cohen
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