States build bridges to pension funds

In the UK, a significant number of pen-sion funds have started discussions to invest in infrastructure or have already invested in the asset class. Local auth-ority pension schemes are among the keenest investors. The pension funds for civil servants in Shropshire, Leicestershire, Northumberland, Merseyside and Fife to mention but a few.

The reasons for this love stems partly from the difficulty in getting sufficient and stable returns from bond markets in Europe, and the stock market volatility has made investors more wary of shares. As diversifying assets, hedge funds, private equity and property have already found their ways into institutional portfolios. In-frastructure is fairly new – and as with most things new, their promise is all the more seducing: Stability, cash flow and low correlation to other assets are all hoped for.

“The attractiveness of real and stable assets in an environment with potential inflationary pressures has led us to investment in infrastructure and other real assets which seek to match the dynamics for which the pension fund is looking,“ Peter Wallach, Head of Pensions at the Merseyside Pension Fund in Liverpool told MandateWire about the fund’s recent investment.

Consultancy firm Mercer’s Amarik Ubhi went along similar lines: “Conceptually, infrastructure’s unique risk-return characteristics dovetail with the investment needs of long-term investors such as pension schemes, sovereign wealth funds and endowments. Infrastructure’s potential to deliver stable, inflation-linked returns through cash yield and capital appreciation, and to also provide diversification from traditional equity and fixed income markets are its particularly attractive attributes.“

But it is not just attractive attributes that brings long-term investors to the asset class. Following the financial crisis, the cash-strapped UK government set up a treasury body called Infrastructure UK, saying: “Some £200bn of investment is planned over the next five years, across the economic infrastructure sectors, of which the majority will need to come from the private sector.”

In a post-2008 world, many governments have discovered pension funds as potential investors in those projects the same governments are unwilling to pay for. In-frastructure asset manager AMP Capital Investors said in their April Quarterly Infrastructure Research Report that more of this is expected to happen in the future. “Looking forward, we anticipate a general trend for governments to increase the risk transfer to the private sector to enable deleveraging of their balance sheets, while not moving to full privatisation of these assets.“

German Ärzteversorgung Westfalen-Lippe’s Head of Investments Markus Altenhoff told MandateWire: “Insurers and especially pension funds are urged more and more by the state to make direct funding available to companies via PPPs which the state can’t or won’t give anymore. That’s a trend that’s becoming increasingly clear.“

Among German institutionals this fund is at the forefront, investing in the power grid at a time that Germany’s nuclear turn will require power to be transported from wind farms in the north to the energy hungry south of Germany. Unlike the UK local authorities, it prefers direct solutions, where intervention is possible and the underlying companies are known.

Infrastructure is a becoming a welcome alternative for pension funds whose belief in traditional asset classes was shaken when they failed to hold up during the financial crisis. But it is also clear that pen-sion funds are becoming a welcome alternative for governments to finance public infrastructure.

Sandra Wolf is Assistant News Editor at MandateWire, a publication from the Financial Times.