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Pension funds: UK Guarantees could unlock construction investment

UK Guarantees could open the door to pension fund investment in construction projects, but goverment needs to get schemes on the ground to show the market how the initiative works in practice, investors have told MPs.

The UK’s biggest pension fund association, which has previously said it will focus on existing assets rather than new infrastructure, confirmed that “a proportion” of the £2bn it is trying to raise through the pension infrastructure platform (PIP) could be targeted on the construction phase of projects if UK Guarantees are used.

It came alongside indications from insurance funds that an “enormous” 15-20 per cent of their relevant portfolio could be dedicated to infrastructure if the conditions are right.

The Treasury estimates that more than 230 projects could be ‘unlocked’ through the UK Guarantees scheme, where it underwrites part of the debt. CN reported this week that 100 expressions of interests have been made for UK Guarantees, but only one project, the Northern Line extension, has been officialy announced so far and is yet to be signed off.

Institutional investors appeared before the Treasury select committee, chaired by Andrew Tyrie, on Tuesday where they stressed their appetite for UK infrastructure.

But a string of questions remain before long-term investors can commit, including the structure and specific detail of UK Guarantees and private finance 2, and the ongoing question over who takes construction risk.

Joanne Segars, chief executive of the National Association of Pension Funds - which represents 1,200 UK funds holding around £800bn in assets - said government needs to give “more [detail] about how UK Guarantees scheme will work so we could use that to perhaps wrap the construction risk”.

Ms Segars, who has previously stressed that pension funds are looking at brownfield rather than new infrastructure, said that “a proportion” of the £2bn could be targeted on the construction phase of projects if UK Guarantees are employed. However she stressed the project would need to be at the low-end of the risk spectrum, such as PF2 assets.

“Partly though government guarantees and partly through other channels; we think that some of that construction risk might be able to be managed or wrapped by others.”

She added: “What we want to do is get involved with the construction phase, but not take on the risk.”

Perry Noble, infrastructure partner at Hermes GPE, said there is an appetite despite the difficult macro environment and risks such as inflation and refinancing.

“The reality is we need to put money to work, there is an appetite to put money to work in this sector. I think we are all gearing up to it.”

But he said there needs to be more detail on how UK Guarantees works in practice to raise confidence.

“There has not been real visibility yet, at least from my institution’s perspective, on specific projects with a guarantee structure in place which we can analyse, and get our mind around what the proposition is. So it’s [about] deal flow.”

Robert Hingley, director of investment affairs at the Association of British Insurers, said up to 15-20 per cent of the relevant portfolio investment from annuities and insurance funds could be destined for infrastructure - a figure described by committee member Jesse Norman as an “enormous” amount of capital.

But he also said there needs to be deal flow to provide comparability across projects, which enables the market to solve the teething issues.

“It’s a little bit like getting the bicycle pedalling properly; once there is a continuing flow of deals, investors and banks are good at solving these problems.

“We may see that once there’s a longer market record, the need for the government to support these transactions partially, may diminish.”

Ms Segars was positive on the PIP, which now has 10 founding investors willing to invest £1bn “if we can structure [it] properly”.

Confronted with comments from former chief construction adviser Paul Morrell questioning the greenfield appetite and the Construction Products Association saying ministers have failed to produce a model with relatively safe payback for private groups, she said: “I think I’m more optimistic. It’s not just a snap of the fingers and you get it done.”

She said there is significant governance to address what is a new asset class for her members and understand the risks, and to create a bespoke solution like the PIP, while also developing expertise in the sector.

“I think it’s a question of timing and I would suggest to those more cynical people, perhaps be a bit more patient.”

It has been almost a year and a half since George Osborne said British funds would invest £20bn in UK infrastructure.

Ms Segars said government action is about the policy changes needed to make infrastructure attractive, including laddressing the EU’s Solvency II restrictions which will classify infrastructure as risky, along with high leverage in the regulated utilities sector.

Pension funds ‘must put returns before infrastructure needs’

British pension funds must put the needs of their stakeholders before those of the country’s infrastructure, the head of the UK’s biggest pension fund association said this week.

Joanne Segars was speaking about the progress of the £2bn pension infrastructure platform, which was originally due to launch at the start of 2013 but could now get off the ground “later this year”.

Ms Segars said: “We’re investing in this to get the right returns for pension fund members; that’s what has to motivate us, not whether the National Infrastructure Plan gets built. That’s not the primary driver.”

But she said as more funds invest, others will follow as infrastructure is “being increasingly recognised” by trustees.

“It’s not the NAPF driving this, it’s our members saying we want to get involved in this, let’s get on and do it.”

Ms Segars reiterated that the NAPF had “never said” it will be looking to invest £20bn, adding that the Treasury had since “clarified” that the number was over the long-term and applied to all institutional investors.

“I think compared to the government’s needs and wants, yes, it’s [£2bn] relatively small but in the context of what’s going on in the wider infrastructure market, it’s quite a large fund.”

Investing with public sector partner “a big concern”

The PF2 structure that gives the public sector an equity stake is “a big concern” for some investors, it was said this week.

Joanne Segars said the experience of working with public sector equity investors is “relatively quite limited.”

Jesse Norman MP asked the panel: “The truth of the matter is that you don’t have much of a feel for what it would be like to be sitting alongside a relevant public investor and the types of tension that might arise; and presumably there might be significant differences of view?”

Hermes’ infrastructure partner Perry Noble conceded that “one of the big concerns we will have is how we will achieve the alignment which I think everyone’s looking to achieve”.

He added: “Particulary where that alignment is more with the sponsor equity in the first phase and there’s a view of the public sector equity being recycled, that alignment with us, being long term investors, will be very difficult to manage.”

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