New projects are unlikely to benefit from George Osborne’s £20 billion “memorandum of understanding” with UK pension funds, it emerged today.
The chancellor confirmed in his autumn statement that the National Association of Pension Funds (NAPF) and the Pension Protection Fund (PPF), along with a separate group representing pension plans and infrastructure fund managers, have signed a MoU with the Treasury to work on increasing investment in the sector.
A lack of specialist knowledge and an aversion to construction risk are two of the central obstacles to investment from British pension funds, which currently only invest 2 per cent of trillions of pounds of assets in infrastructure.
Mr Osborne is targeting up to £20bn of investment on the back of the agreement, along with the creation of a new Insurers’ Infrastructure Investment Forum, being set up with the Association of British Insurers to encourage investment from the capital markets.
Joanne Segars, chief executive of the NAPF, which represents 1,200 pension funds with members holding around £800bn in assets, said the move could be a real win-win as the UK desperately needs to update its infrastructure, and pension funds are looking for inflation-linked, long-term investments.
But she stressed that the NAPF sees this memorandum as “looking very much at brownfield”, or existing infrastructure.
“(New build) may be attractive to some pension funds, but overall that is not what this is looking at,” she told CN.
Ms Segars added that the £20bn number is a “Treasury figure”, and not an NAPF target.
There could be more interest in new infrastructure from the separate group of funds that signed the MoU, which includes Hermes GPE, Meridiam, the London Pensions Fund Authority and the Greater Manchester Pension Fund.
Peter Hofbauer, head of infrastructure at Hermes GPE, said it is “far too early” to talk about solutions that would encourage investment in new projects, but that the agreement with the Treasury is about creating a framework for investment.
Richard Laudy, head of construction at law firm Pinsent Masons, said: “Both the Autumn Statement and the National Infrastructure Plan are lacking in detail as to how investment in infrastructure is to be made an attractive proposition for pension funds.”
Alan Rubenstein, chief executive of the PPF, told CN that a way forward would be a model that pulls together the various UK schemes - described by some as a “fund of funds” - and is backed by a government guarantee, similar to the credit easing scheme underwriting loans to small businesses, to mitigate the risk of investing in new infrastructure.
But earlier today, Mr Osborne denied a suggestion from Margaret Hodge MP that pension fund investment amounts to “PFI by any other name”, and insisted that the government would not provide guarantees for projects.
Mr Laudy said key issue for pension funds include:
Packaging of projects to ensure there is appetite for investment by pension funds.
Ensuring that construction risk in publicly procured projects is adequately mitigated.
Government backing and guarantees to pension funds.
Underwriting returns to institutional investors in public projects.
Hedging against inflationary pressures.