The expectation of increased allocations to U.K. infrastructure by channeling England and Wales' 89 local government pension funds into six British wealth funds has left sources in the pension fund and consulting industries with some major concerns.
In his speech at the annual Conservative Party conference, George Osborne, chancellor of the exchequer, made clear his desire for part of the £190 billion ($288.6 billion) of assets within these public sector pension funds be put to work building a “better Britain.”
“The infrastructure aspect is the most controversial thing” in the government's plans for the Local Government Pension Scheme funds, said a pension executive, who requested anonymity.
The concern was raised by the chancellor's Oct. 5 speech. He said: “We are going to find new ways to fund British infrastructure that drives our productivity. At the moment we have 89 — 89 — local government pension funds with 89 sets of fees and costs. It's expensive, and they invest little or nothing in our infrastructure.”
“Crucially,” said Mr. Osborne, the six British wealth funds, which will be “spread across the country ... will invest billions in the infrastructure of their regions.”
Figures from the Treasury said that across about £180 billion of LGPS assets in 2012-2013, only about 0.5% was invested in infrastructure projects.
The pension fund executive said his concerns included the focus on U.K. infrastructure investment, while many of the LGPS invest internationally for diversification purposes; and conflicts of interest when it comes to deciding where to place investment in infrastructure.
“Regional infrastructure ... introduces the potential for significant conflicts of interest if local politicians think they have a pot of money to spend on pet projects.” LGPS, he said, have a fiduciary responsibility to invest in the best interests of their beneficiaries.
And there is a bigger concern. “If the Treasury mandates infrastructure investment, some legal opinion indicates our assets and liabilities (more significantly) need to go on the national balance sheet — the last thing they want,” the executive said.
Sources debated whether the government could mandate an allocation to U.K. infrastructure from the British wealth funds. A source familiar with the situation said there are no stipulated infrastructure mandates or targets on the funds. He reiterated the government's hope that the LGPS — told in the U.K.'s Summer Budget July 9 that they were expected to come forward with pooling proposals — would be “ambitious.”
At the time of the Summer Budget, the government also warned that backstop legislation would be developed to “ensure that those administering authorities that do not come forward with sufficiently ambitious proposals are required to pool investments.”
Jeff Houston, head of pensions in London at the Local Government Association, said while each of the six British wealth funds would not be forced to allocate a certain percentage of assets to U.K. infrastructure, “it may be that proposals would have to spell out how they provide the potential for more opportunities in cost-effective infrastructure investment.”
The LGPS has plenty of examples to look toward for inspiration in their pooled infrastructure investment. Sources highlighted examples including:
nThe £16 billion Greater Manchester Pension Fund, Manchester, England, and the £4.9 billion London Pensions Fund Authority, London, in January teamed up to commit up to £500 million to invest in infrastructure opportunities;
nFive Swiss pension funds came together in July 2014 to commit 300 million Swiss francs ($308.9 million) of assets to invest in infrastructure through the not-for-profit IST Investment Foundation. One aim is to invest in domestic infrastructure;
nA group of 10 U.K. pension funds came together with the National Association of Pension Funds to create the Pensions Infrastructure Platform, which has already helped make more than £1 billion of commitments to U.K. infrastructure projects. The platform launched in 2011; and
nMelbourne, Australia-based IFM Investors, which launched more than 20 years ago and is owned by 30 not-for-profit pension funds. The firm invests in infrastructure among other asset classes.
However, sources said far more government guidance will be necessary before LGPS can contemplate pooling.
“The government's approach of creating big schemes and pushing toward investment in infrastructure kind of misses the point,” said Andrew Kirton, EuroPac investments leader at Mercer Investments in London. “(They) should be thinking, "How do you make infrastructure an attractive asset class?' Where (pension funds) aren't investing more in infrastructure, it might be to do with size, but probably (is more) to do with the way infrastructure deals are constructed, the risks of infrastructure. I think a lot of institutional investors are nervous of investing ... and there are clear risks.”
Mr. Kirton said he was “slightly perplexed” that more attention had not been paid to making infrastructure “attractive to institutions” through guarantees and other methods. “(There is) a lot that the government could do that would draw investors in.”
Roger Urwin, global head of investment content in Reigate, England, at Towers Watson & Co., said that investment in infrastructure will take time, and to imagine that local authorities could become a big factor in funding particular types of infrastructure in the near term is “a bit of a stretch.”
“That said, if (the government) can solve the problems of approaching infrastructure in an effective manner,” it could make a difference over a period of time, Mr. Urwin said.