Pension fund investment in infrastructure

A relatively "new" asset class

Although traditionally the preserve of governments and municipal authorities, infrastructure has recently become an asset class in its own right for private sector investors- most notably pension funds ^[1][2]

Historically, pension funds have tended to invest mostly in "core-assets" such as money market instruments, government bonds, and large-cap equity, and, to a lesser extent, in "alternative assets" such as real estate, private equity and hedge funds,^[3] the average allocation to infrastructure representing only 1% of total assets under management by pensions- excluding indirect investment through ownership of stocks of listed utility and infrastructure companies.

But government disengagement from the costly long-term financial commitments required by large infrastructure projects in the wake of the 2008–2012 global recession,^[4] combined with the progressive realization that infrastructure could be an “ideal asset class” providing tangible advantages such as long duration- facilitating cash flow matching with long-term liabilities, protection against inflation and statistical diversification (low correlation with ‘traditional’ listed assets such as equity and fixed income) has prompted an increasing number of pension executives to consider investing in the asset class- this macro-financial perspective to pension investment in infrastructure was developed by Canadian and European financial economics experts, notably the World Pensions Council (WPC).

Canadian, Californian and Australian early entrants

Pension funds- including superannuation schemes account for approximately 40% of all investors in the infrastructure asset class, excluding projects directly funded and developed by governments, municipalities and public authorities. Large Canadian pension funds and sovereign investors have been particularly active in the field of energy assets such as natural gas and natural gas infrastructure, where they have become major players in recent years ^[5]

Until recently, apart from sophisticated jurisdictions such as Ontario, Quebec, California and the Netherlands, most North American, European, and UK pensions wishing to gain a degree of exposure to infrastructure assets had done so indirectly, through investments made in infrastructure funds managed by specialized Canadian, US and Australian funds ^[6][7]

UK Pensions Infrastructure Platform

On November 29, 2011, the British government unveiled an unprecedented plan to encourage large-scale pension investments in roads, hospitals, airports, etc. across the UK. The plan is aimed at enticing 20 billion pounds ($30.97 billion) of investment in domestic infrastructure projects “over the next decade”. On October 18, 2012, HM Treasury announced that the National Association of Pension Funds (NAPF) and the Pension Protection Fund (PPF) had succeeded in “securing a critical mass of Founding Investors needed to move to the next stage of development [...] [and that] several major UK pension funds have signed up to the Pension Infrastructure Platform (PIP). The intention is that the Founding Investors will provide around half of the target £2 billion of investment capital for the fund, before it launches early next year” ^[8]

"Infrastructure nationalism"?

Some experts have warned against the risk of "infrastructure nationalism", insisting that steady investment flows from foreign pension and sovereign funds were key for the long-term success of the asset class- notably in large European jurisdictions such as France and the UK ^[9]

References