The UK has considerable infrastructure needs for the next two or three decades which aren’t set to be paid for by the taxpayer – not unless one of the two main political parties decides to take on massively more public debt anyway, which seems very unlikely. For two or three years, politicians have been making enthusiastic noises about getting pension funds to finance all this infrastructure, as I’ve previously noted. Infrastructure suits pension funds because it’s relatively stable and pays out returns over long periods of 20-30 years or more, matching the liabilities of pensioners expecting payments over a similar time period.
There are many challenges to overcome in leading the pension fund horse to the pool of water that is infrastructure projects, but I’ll concentrate today on size. If you are a pension fund with, say, one to ten billion pounds or dollars of assets (i.e. pension pots to manage) and you want to finance infrastructure, you have a problem. You don’t want to take big risks with your members’ money compared to other investors, and so you want to spread your money across a range of investments. But any greenfield (new-build) infrastructure project worth financing in his way is probably going to cost hundreds of millions of pounds/dollars, if not billions. That could easily account for over 10 per cent of your assets – and only on one project! Within the asset class marked ‘infrastructure’, you’d want to invest in a diverse range of projects to reduce your exposure if one of the projects goes wrong.
Also, the smaller the pension fund, the bigger the relative cost of paying fees to advisers and fund managers who will pick infrastructure investments for them. Even if your advisory firm only has six staff earning a total of £500,000 (stingy for the City), you’d need to handle an investment of £50 million to charge a likely fee of half a per cent. Giant pension funds such as APG (€334 billion assets under management) and PGGM (€140 billion AUM) in the Netherlands have no direct counterpart in the UK, and their collective, as opposed to individual, savings approach added to their size reduces the relative cost of such fees.
And guess what? They’re also more interested in financing infrastructure than UK pension funds. PGGM has formed a joint venture with Dutch construction giant BAM to bid for new build infrastructure projects. They’re currently upgrading bits of the N11 and N7 roads in Ireland and the N33 in the Netherlands – to name but two projects. That second project is also being financed with the help of a loan from… APG.
In this light, it’s positive that British pensions minister Steve Webb announced earlier this year that he wanted to see big companies pool their pension fund resources together in collective defined contribution schemes, just like the ones in the Netherlands.
Ah, but wait, I hear you cry. Isn’t there a Pensions Infrastructure Platform in the UK which is designed to allow pension funds to invest in infrastructure? Well, there is, but whether it’s going to achieve anything worthwhile is another matter… for another post.
P.S. Interesting to read this week that there’s a related problem in Australia, where the fastest-growing section of the pensions industry is in very small “self-managed superannuation funds” which can be under A$1 million in assets. These will need a LOT of pooling. More here.