UK pension fund investment in infrastructure could still be years away, despite the government’s pledge to pave the way for such spending in the next few years, leading project finance experts said this week.
On Sunday, the Treasury signed a memorandum of understanding (MoU) with the National Association of Pension Funds and the Pension Protection Fund to help their members more readily invest in infrastructure.
This was followed by chief secretary to the Treasury Danny Alexander’s announcement on Monday that around £20bn of pension fund investment would be garnered for infrastructure, which would “bear fruit” in the next few years (see below).
However, while financiers welcomed a move by the government towards heeding the economic value of infrastructure investment, they doubted the timeframe.
They said that UK pension funds were coming from “behind the curve” as international pension funds already heavily invest in infrastructure.
“One thing that is probably true to say is that the structure of UK pension funds doesn’t lend itself to the economies of scale in investment in infrastructure”
Lloyds Banking Group’s global head of project finance Gershon Cohen
Lloyds Banking Group’s global head of project finance Gershon Cohen said it would be “well into 2012 before the structure takes shape,” leaving question marks as to when funding could be tapped into.
The MoU said an infrastructure investment vehicle would be established to allow UK pension funds to “pool their resources to invest in key UK infrastructure assets and projects in a new way”.
Cohen told NCE that big international pension funds had a huge advantage over the UK’s funds due to their sheer size.
“One thing that is probably true to say is that the structure of UK pension funds doesn’t lend itself to the economies of scale in investment in infrastructure as it does in Australia and Canada,” he said.
“They have large state or quasi-state pension funds but in the UK we have no equivalent. Instead of a large state teachers’ fund like you have in Ontario, you have a larger number of mid-sized local authority funds for the teachers in that specific local authority.
‘More detail needed’
Cohen said he recognised that the government was trying to achieve a way of aggregating and managing a larger capital pool of investment but that more detail was needed, particularly to give clarity to what would entice risk-averse pension funds to invest in an asset that is traditionally seen as risky.
Credit Agricole head of project finance Liam O’Keefe said size wasn’t the only issue to combat. He said pension funds have never been keen to be a provider of debt, which is the missing element in project finance deals. He said this was because bank debt has been constrained by the credit crisis.
“You need to give them [pension funds] the right grades, usually AA or AAA debt or a single A rating at the very least,” he said, explaining that these debt ratings have the least risk attached to them.
“It is a new area and there will be concern about understanding the risk”
Credit Agricole head of project finance Liam O’Keefe
In the past, Monolines (insurers) used to provide a type of insurance for infrastructure investors, so if there was a default, these Monolines would pay back the debt. However, since the crash, the Monolines have been wiped out, said O’Keefe.
He said a new type of debt fund that would take on more risk than pension funds would take, such as Hadrians Wall Capital, could replace Monoline insurance.
But he was still unsure how comfortable pension funds would be with this arrangement given that the model is relatively unproven.
“I think the amounts [pension funds] have to commit will be very small,” he said.
“It is a new area and there will be concern about understanding the risk.”
He said that another barrier for UK pension funds was that they had very little intellectual capital available to deal with infrastructure financing.
“Eventually they might be able to start recruiting infrastructure professionals from banking teams for example, but that’s going to take a long time,” O’Keefe said.
Autumn Statement 2011: Experts warn pensions investment years away