UK Government Targets Pension Funding for Infrastructure, Consultants Express Hesitation

(November 29, 2011) — The UK’s Chancellor of the Exchequer George Osborne has announced a £30 billion plan to build roads, railways, power stations and schools, with the Government set to provide only a third of the investment — £5 billion by 2015.

Future infrastructure projects are scheduled to be funded by an ‘investment platform’ — a joint venture between Government and private funds. After 2015, the Government is scheduled to invest another £5 billion for longer-term projects over the following five years. The remaining portion of the infrastructure investment will come from institutions, such as pension funds. 

Osborne said in his Autumn Statement: “We need to put to work the many billions of pounds that British people save, in British pension funds, and get those savings invested in British projects. You could call it British savings for British jobs.”

On the announcement that the Government will unlock £20 billion from pension funds for infrastructure investment, Colin Robertson, global head of asset allocation at Aon Hewitt, told aiCIO in an emailed statement: “It is good to see the Government talking to pension funds about their requirements for investment. There is considerable demand from pension funds for infrastructure investments and this should be especially the case for Local Government schemes which can adopt a longer time horizon. However, pension funds must consider what is best for their scheme. They will need to take account of the illiquid nature of infrastructure and carefully assess the financial terms of the Government’s proposed investments.”

Another consultant reiterated the importance for pension funds to consider what is best for their scheme, noting 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,” Timothy Barron, president and CEO of consulting firm Rogerscasey, told aiCIO. “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.” 

The UK Treasury, which is seeking £250 billion infrastructure investment over the next several years, has signed a memorandum of understanding with The National Association of Pension Funds (NAPF) — whose members have £800 billion of assets — to increase their spending on such projects. Joanne Segars, Chief Executive of the NAPF, said: “We’re excited by the Government’s commitment to try to make it easier for pension funds to back major infrastructural projects, and we look forward to working on the details with them…This could be a real win-win. The UK desperately needs to update its infrastructure, and pension funds are looking for inflation-linked, long-term investments.”

Segars continued: “Pension funds hold over a trillion pounds in assets, but only around 2% of that is invested in infrastructure. There’s the potential for that to be much higher. Infrastructure is a good fit with the needs of pension funds because projects like ports and power stations can offer a reliable return over a long timeframe.”