From aiCIO Magazine's Winter 2011 Issue: Are governments coercing funds to invest, or are such funds investing on their own volition—and with their own profit in mind?
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As US and global infrastructure crumbles as a result of wear and tear by soaring populations, governments, in a state of desperation, are increasingly turning to the large cash reserves of pension funds for help. New York Governor Andrew Cuomo exemplifies that trend among cash-strapped governments: in order to create jobs and aid the state's ailing economy, he is eyeing union pension funds to finance major projects, such as rebuilding the Tappan Zee Bridge. As part of the Governor's proposal, he is championing the creation of a so-called “infrastructure bank.”
On the other side of the Atlantic, as Europe battles its deepest budget cuts since before the Second World War, Chancellor of the Exchequer George Osborne is trying to revive the economy, finalizing an agreement with pensions and infrastructure investors to finance projects. A group of funds, including Hermes GPE LLP, Meridiam Infrastructure, the Greater Manchester Pension Fund, the London Pensions Fund Authority, and others— managing a total of roughly $77 billion— signed a memorandum of understanding in November, noting that the group will work at attracting additional corporate pensions to invest. The agreement urges pensions to allocate money to fund an array of construction projects, while also providing cash to existing projects.
One of many questions, however, is this: are governments coercing funds to invest, or are such funds investing on their own volition—and with their own profit in mind? In other words, are institutional investors flocking to infrastructure (and abiding by their fiduciary duties) because it is the best possible investment, or are they spurred to invest in the asset class due to external pressure from governments demanding support?
Some consultants believe that while the relationship between local governments and pension schemes can be a symbiotic one, with the benefit of infrastructure investing equally shared by both parties, the relationship often risks being plagued by misaligned interests. “Pension funds are, first and foremost, bound by their duties as fiduciaries and as such must seek the best possible investments, balancing expected returns with potential risks,” says Timothy Barron, president and CEO of consulting firm Rogerscasey. “Yet, for public plans particularly, there is a symbiotic relationship with their sponsoring entity, where a healthy sponsor is crucial to the long-term viability of the plan itself. Infrastructure investing may be an example where the plan fiduciary can provide capital to support the sponsor while benefiting the plan as well—this must be determined through careful due diligence of each individual opportunity, however, and is fraught with the potential for misaligned interests.”
Clearly, the onus is on the fiduciaries of these large defined benefit pension plans to ensure that the scheme is investing in infrastructure as an income-generating, stable investment—and not simply investing to supply Albany, for example, with a hefty bout of financing for desperately needed public works.