The three infrastructure promises the government must make to secure large-scale pension fund investment
It’s been a year since my appointment as chief executive of the Pensions Infrastructure Platform (PiP) − and what a year it’s been. Over the past 12 months through external investment managers PiP has helped secure over £1bn of commitments from pension schemes to invest into UK infrastructure projects.
Over £500m of this has been for the PPP Equity PiP Fund managed by Dalmore Capital, over 130m for the Aviva Investors PiP Solar Photovoltaics (PV) Fund and the rest for the Thames Tideway Tunnel Project, also in collaboration with Dalmore Capital.
The next steps are Financial Conduct Authority (FCA) authorisation to allow PiP to be a direct infrastructure investment manager, and the subsequent launch of an internally managed PiP Multi-Strategy Infrastructure Fund.
We’ve already starting putting the building blocks in place with two senior appointments of an investment director and a chief operating officer earlier this year.
Increasingly, UK pension fund investors are recognising the benefits of investing in infrastructure, but it hasn’t always been straightforward for them to do so.
Historically, it’s been difficult and expensive for individual pension funds to invest in infrastructure on their own, either directly buying actual assets or investing into commercially run comingled funds.
PiP was set up “by pension schemes for pension schemes” to change this and provide another, better way for pension schemes to invest in infrastructure.
Another hurdle has been the risk/return structure of certain infrastructure projects and whether they are appropriate for pension scheme investors, who typically require consistent low risk, long-term, inflation linked cash flow returns that help them meet their regular pension payment obligations.
Greenfield infrastructure projects have generally been considered unsuitable for pension scheme investment because of the level of construction risk they carry.
However, as the Thames Tideway Tunnel illustrates, with the aid of a government guarantee and risk sharing terms in the construction contracts, even huge new build projects can be structured in such a way that the risk is mitigated to a level acceptable to pension funds. This has enabled UK pension schemes to invest in this project to the tune of over a third of a billion pounds – a great result.
As we saw in the Summer Budget 2015 and the subsequent productivity plan, infrastructure continues to be high on the government’s agenda, but these words need to be turned into action.
To open the door to large-scale pension fund investment in UK infrastructure PiP is calling on government to promise three things: a long-term pipeline of suitable infrastructure assets to give pension schemes the confidence to build their internal investment systems and capabilities; a commitment to structure projects in a way that will deliver the low risk cash flows that pension schemes need; and the appointment of an infrastructure minister to ensure that government takes the decisions needed to progress infrastructure projects which can be funded by pension schemes who are ready and waiting to invest.
Mike Weston is chief executive of the Pensions Infrastructure Platform, www.pipfunds.co.uk