Survey: Mixed Messages by UK Gov't Makes Pensions Wary Over PFI Investing

(October 9, 2011) — Pension funds are increasingly cautious over investing in private finance initiatives, according to a survey by schemeXpert.com and Pensions Week of 44 scheme managers, investment directors, and trustees — whose combined control of assets is in excess of $194 billion.

While schemes are being encouraged to finance economic growth by investing in infrastructure and other private finance initiatives, which use private sector money to fund public sector development, pensions are more and more cautious as a result of mixed messages from the UK government.

“There is definitely scope to do more, but pension funds need to feel confident future governments won’t change the rules after they get their hands on our money,” the chief executive of an £8 billion scheme told the Financial Times. “Talk by the current government about trying to renegotiate the previous administration’s PFI contracts – whether or not you think they were good deals – doesn’t help confidence.”

At a recent National Association of Pension Funds event, Mark Hoban, financial secretary to the Treasury, asserted that it is imperative that pensions analyze the role of private finance initiatives, with investors and the government working closely together to explore the benefits of using the private sector, the FT reported, adding that a number of big UK scheme have announced their aims to invest in infrastructure, with some having begun developing in-house expertise.

In May, Mercer revealed that the demand for private sector involvement in infrastructure investments is on the rise. The consultancy noted that over the previous six months, the firm had boosted its exposure to the asset class. But, while infrastructure investment has taken off in the UK and Australia, for example, opportunities in infrastructure investment in the United States have been lacking. “Infrastructure investment hasn’t taken off in the US,” Mercer spokesman Mercer Salmans told aiCIO. 

“We believe unlisted infrastructure enhances diversification and reduces equity risk thanks to its lower correlation with listed markets,” Melbourne, Australia-based Russell Clarke, Mercer’s chief investment officer and leader of it’s portfolio construction team in Asia Pacific, said in a statement. “It’s an asset class with some unique diversifying characteristics that we’ve identified as critical to achieving an appropriate balance in our investment portfolios.”

Clarke continued: “The winners in today’s infrastructure market will be investors who pay sensible prices based on realistic assumptions for future growth and inflation, at appropriate discount rates. Those who can strike the optimal capital structure for an asset and have a superior ability to manage it effectively once acquired will be successful investors.”

The commitment to infrastructure in the UK — which has been largely leading the growth in infrastructure investment — can be seen by a report by the London-based Business Infrastructure Commission, which concluded that the government should provide incentives to encourage pensions to invest in large-scale projects in the region, which suffers from “some of the most congested and problematic infrastructure.” Professor David Begg, chairman of the Business Infrastructure Commission, urged in the report that the government should focus on piecing together the so-called infrastructure puzzle by concentrating on a detailed long-term infrastructure strategy and on procurement reform and improvements to the planning system for major projects. Additionally, the report advised focusing on attracting private finance by enabling the pension and insurance industry to increase levels of investment in infrastructure by introducing a stable regulatory framework and appropriate incentives.