Chancellor of the Exchequer Philip Hammond's commitment to increased infrastructure spending was welcomed by money managers because it could help pension funds in the U.K. plug their deficits.
In his first Autumn Statement, Mr. Hammond announced Wednesday that the Conservative Party government will “prioritize additional high-value investment, specifically in infrastructure and innovation, that will directly contribute to raising Britain's productivity.”
The focus on infrastructure was welcomed by the Investment Association, which represents U.K. money management firms managing £5.7 trillion ($7.2 trillion) of assets. The association also called for the development of a U.K. municipal bond market, “which will help local authorities secure much-needed financing to invest in new infrastructure projects and meet their refinancing needs, by launching a position paper outlining our support and the benefits of municipal bonds for investors, borrowers and the wider economy,” said Chris Cummings, CEO of the IA, in a news release. He added that 60% of all new capital market fundraising is funded by the money management industry.
“Government investment in infrastructure is often seen as an attractive investment for pension funds in need of reliable long-term investments,” said David Curtis, head of U.K. institutional sales at Goldman Sachs Asset Management, in a statement provided by e-mail, in response to Mr. Hammond's speech.
However, the value of the opportunity depends on the type of assets being offered. Operational core infrastructure projects, known as brownfield, that offer solid, nominal or inflation-linked income “are exactly the kind of projects needed by schemes struggling to find sufficient long-term investments with the income profile they require to meet liabilities.” Greenfield development projects are unlikely to appeal, Mr. Curtis said.
Vivek Paul, director, client solutions at BlackRock, said in a news release: “Though no silver bullets exist, the chancellor's announcement of new infrastructure projects highlights one avenue of opportunity for pension funds to begin to claw back their deficits. A natural advantage for pension funds, relative to many other investors, is their greater ability to hold illiquid assets.”
Sir Merrick Cockell, chairman of the £4.6 billion London Pensions Fund Authority, London, said while there is no shortage of funds to invest in U.K. infrastructure, “what is lacking are the appropriate assets and the right deals to invest in.”
Mr. Hammond also revealed the Office for Budget Responsibility's latest growth forecast for the U.K., and said GDP growth in 2016 has been revised upward to 2.1%, vs. 2% in March.
Growth is set to slow to 1.4% in 2017, down from a 2.2% forecast in March, which the OBR attributed to “lower investment and weaker consumer demand, driven, respectively, by greater uncertainty and by higher inflation resulting from sterling depreciation,” Mr. Hammond said.
As the effects of uncertainty over the U.K.'s decision to leave the European Union diminish, the OBR expects growth to recover to 1.7% in 2018, 2.1% each in 2019 and 2020, and 2% in 2021.
“While the OBR is clear that it cannot predict the deal the U.K. will strike with the EU, its current view is that the referendum decision means that potential growth over the forecast period is 2.4 percentage points lower than would otherwise have been the case,” Mr. Hammond added.