Debt Ceiling Worries Hit US Federal Pensions for Second Time

Concerns over the impending US debt ceiling have impacted the pension fund for Federal Employees for the second time in two years.

(January 16, 2013) — The US federal employee pension fund is to be plundered by the country’s Treasury in an attempt to avoid breaching the approaching debt ceiling just a year after contribution payments were temporarily halted over the same issue.

Treasury Secretary Timothy Geithner announced yesterday that the government had begun borrowing from the fund, but it would replace the borrowings once the debt ceiling negotiations were completed.

In a letter to congressional leaders Geithner said the move would free up $156 billion in borrowing authority while Congress debated increasing the $16.4 trillion debt limit.

A year ago, Geithner said employer contributions would be halted until negotiations to avoid breaching the debt ceiling were completed. At that point the debt ceiling sat at just under $15.2 trillion.

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The Federal Employees Retirement System is one of the largest pension funds in the world. At the end of 2007 it had liabilities of $1.7 trillion and a shortfall of $878 billion, according to documents published by the US Office of Personnel Management.

The US Treasury has been injecting supplements to the Federal fund for over 30 years in an attempt to resolve the deficit. Since 1979, the department has supplemented the scheme with an annual payment that reached almost $30 billion in 2006. These taxpayer-funded payments were scheduled to increase until 2080.

Equity Infrastructure Investment – The Next Big Thing?

Investing in infrastructure is becoming increasingly popular, yet barriers remain to accessing all categories of the asset class.

(January 16, 2013) — Leading European academics have begun a research initiative to examine how institutional investors could better access and benchmark equity investment in infrastructure.

The Edhec-Risk Institute has launched a research chair to concentrate on an increasingly popular asset class, but using a relatively unused manner of investment.

“It will focus on fostering data collection and aggregation from investors and on improving the benchmarking of return distributions for direct and indirect investment in infrastructure equity by developing an academically-validated and industry-recognised index,” the institute said this week.

Investment firm Meridiam Infrastructure and advisory Campbell Lutyens are co-sponsors of the research chair.

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To coincide with the launch, the institute has published a foundation paper on the issue that sets out the task in hand.

The paper, “Towards Efficient Benchmarks of Infrastructure Equity Investments“, highlights a recent research quandary with respect to infrastructure equity investment, which has also been a question for final investors.

“While the economics of underlying infrastructure investment suggest a low and potentially attractive risk profile, the experience of investors and available research evidence have been different and rather mixed. This paper explains why this has been the case and what new research and benchmarking efforts are necessary to create investment solutions that align expectations and observed investment performance of infrastructure equity,” the institute said.

The paper concludes that existing data on the sector needs to be reclassified, new data collected and significant theoretical work needs to be done before appropriate benchmarks can be created. It added that this work would also help test the sensitivity of equity investment to different categories of risk found in project finance, regulated utilities, and other infrastructure areas.

Separately, a note from the United Kingdom’s National Audit Office (NAO) today said there was a danger that institutional investors would not commit to infrastructure projects unless they were insulated from construction risk.

The NAO said the £20 billion targeted by the UK government may not be achieved if mitigating actions were not made to reassure investors.

To read the Edhec-Risk Institute paper, click here.

To read the note from the NAO, click here.

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