How are pension funds in the UK to be inveigled into investing in much-needed infrastructure? It’s a question that has been on the minds of politicians and policy wonks for a while, as this blog has observed. And we might have hit on the answer – but, with classic British pusillanimity, it’s the answer to the wrong question.
The Pensions Infrastructure Platform was set up in 2012-13 by the pension funds industry in order to pool the capital of many funds in one place, so that they could use economies of scale to pay infrastructure experts to manage their funds, and to give them sufficient size to make the eight- or nine-figure investments infrastructure projects demand.
Although the government has only taken an advisory role in setting it up, HM Treasury has been keenly looking over the PIP’s shoulder and egging it on: the latest edition of its National Infrastructure Plan refers approvingly to the PIP, while Chief Secretary to the Treasury Danny Alexander congratulated the pension funds when the PIP announced its first infrastructure fund this year. Strathclyde Pension Fund, British Airways Pensions and the Pension Protection Fund are among those investing.
There’s just one small problem from the government’s point of view. Government is concerned with building new infrastructure – the ‘greenfield’ market – and raising the necessary cash. Pension funds, as I’ve mentioned previously, don’t tend to like taking construction risk on these greenfield projects (however misguided that is, as I noted here). They are more comfortable with projects that are already built.
And so it is that the PIP, which Mr Alexander and his boss George Osborne seem to think is a way of getting pension funds to build new infrastructure, is not going to do that. My old employer IJGlobal reported this week that the PIP’s next two funds will not, like the first fund, invest in greenfield projects (you can read that much before you hit the paywall). So precisely zero of the £330 million they’ve committed so far will actually help build anything. Until they get some new investors, that’s not going to change.
The PIP isn’t entirely useless. Pension funds today do need to find more sources of stable yet high-enough-yielding investments. And getting British pension funds to invest in UK infrastructure (instead of the many foreign investors already active here) means that the profits from that infrastructure stay in the country. But it doesn’t do what the government has been hoping, planning and heavily implying to us all that it would: pay for new infrastructure. Not for nothing has a certain senior infrastructure financial adviser in this country with a penchant for mordant humour dubbed it “a solution in search of a problem”.