The future of UK infrastructure investment rests with the country’s pension funds, writes Ted Frith
UK politicians sporting hard hats, hi-vis and aspirational slogans. We’ve seen it many times before. But this time it feels different.
It feels now that there is growing consensus that the country will need to build its way into an economic recovery. And infrastructure investment – whether funded by the taxpayer or through institutional investors like pension funds – will increase in importance.
The infrastructure community will be buoyed by Prime Minister Boris Johnson’s enthusiasm and appetite to get spades in the ground. Yet, even with such encouraging words, we’re still waiting for the long-delayed Infrastructure Finance Review, which will provide some clarity, substance and direction to the government’s ambitions.
If I were speaking with Chancellor Rishi Sunak before his next Budget (the Autumn Budget was cancelled due to COVID-19 crisis), I’d be saying the following:
The government cannot do it alone
The smart decision would be to dig deep and start building infrastructure projects right away. The government has access to the cheapest source of capital in the market – Gilts. I’m preaching to the converted, but, for the government, it provides stimulus to the economy, creates jobs and kick-starts much-needed infrastructure development as we build our way out of the pandemic, much like we have done after similar economic crises.
Of course, the Treasury won’t be able to keep printing money indefinitely and will need to bridge the enormous infrastructure funding gap with the help of the private sector. So, the Chancellor will need to find a more reliable way of financing the development of smaller projects – not just the marquee assets like HS2 – to replace the now redundant and much-maligned PPP model.
Whether in the development or operational stage, the government has the opportunity to syndicate risk to the private sector and capitalise on the incredible pool of global private capital that is hungry to put money to work. Thereby freeing up its balance sheet and capital to finance further projects. It may also turn a tidy profit from development and construction risk-taking.
Insurers and pension funds have a role to play in this, as significant sources of long-term capital. Insurers, and in particular life insurers, are attracted to direct investments in these long-term assets but operate in a different regulatory regime to pension funds.
As insurers grapple with their asset-liability-management obligations, their attention is perhaps narrowed on a specific subset of assets – those with the most certain cash flows and ability to produce useful risk adjusted returns. While that capital will be well received, it isn’t going to support all the needs of the infrastructure community. Naturally, I’d make the case that pension funds can be an even more attractive source of capital.
The argument for pension funds to invest in infrastructure is well-trodden – the asset class offers durable, long-term investment opportunities that sit naturally with their liability profiles. There is also a material social benefit too. Many funds have a strong appetite to support economic development and, ultimately, help the communities of the members they represent. The ability to deliver new trains, cleaner sources of energy or better water services – above and beyond their underlying return obligations – is attractive.
Why should infrastructure look to pension funds?
It’s the responsible thing to do. First, the capital base of pension funds is stable. Where other investors have relatively shorter outlooks, pension funds are looking to establish themselves as long-term stewards of the assets. Typically, the investment perspective is framed in decades, not months and years.
That means many pension funds are unlikely to suffer commercial pressures to trade assets for the benefit of performance or management fees and can invest time in robust governance and driving socially responsible investment. But crucially, while there is an overarching obligation to pay pensioners and fulfil those liabilities over the very long term, the industry doesn’t share the same regulatory framework as insurers.
Pension funds have the opportunity to take a more holistic view on what is out there in the market, in terms of risk and reward. Being less sensitive to short-term fluctuations in asset value and cash flows means they can potentially take some risk on projects in the development or construction stage, as well as supporting operational assets. This creates more diversified investment portfolios as well as providing capital to infrastructure projects from a broad range of class, scale, stage of development and purpose – for the benefit of regional and national economies.
Pension funds have already invested some capital in infrastructure. But there is so much more potential capital to leverage – from private to local government pension funds across the country.
Communicating the benefits
However, as I finish my discussion with the Chancellor, I’d remind him that, no matter how the decision is made to pay for those infrastructure plans or work closer with the private sector, one fundamental challenge remains. Without a concerted effort to better inform the public about the benefits of infrastructure investment, the political capital to sustain that investment will be left wanting.
Our own research has shown that the public are largely in the dark when it comes to the value of infrastructure investment. They look to the government to lead it but aren’t sure of the impact it brings.
The government has a responsibility to ensure that whatever projects are proposed, they are better understood. People need to see the value to the taxpayer – the return in jobs, productivity, skills, community investment and social good.
Otherwise, we’ll still view those hard hats on the evening news with as much scepticism as we have in the past and the political momentum will once again leave capital underused and infrastructure waiting for the spotlight of the next election.
Ted Frith is COO of GLIL, an £1.8bn infrastructure investment fund backed by Northern LGPS and Local Pensions Partnership