Great expectations


16 Apr 2024

The government has big plans for the UK’s infrastructure, but who wants to pay for it? Chris Newlands reports.


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The government has big plans for the UK’s infrastructure, but who wants to pay for it? Chris Newlands reports.

It was an eye-roll moment for some during Jeremy Hunt’s Mansion House speech last summer when he outlined his grand vision to get UK pension funds investing in unlisted companies to try and boost Britain’s economic growth.

The indifference was not down to a lack of appreciation of his drive to get defined contribution (DC) funds investing a proportion of their assets in infrastructure, as well as startups and green technology. It was because they had been here before.

Hunt is not the first chancellor to try and persuade large investors to finance the upkeep of the country’s much-needed infrastructure, such as new roads, hospitals and energy upgrades, and he will not be the last.

In November 2011, the then chancellor George Osborne used his Autumn Statement to declare that he had negotiated a deal with the National Association of Pension Funds and the Pension Protection Fund to “unlock” £20bn of retirement fund savings to be used to “overhaul the physical infrastructure of our nation”.

Almost four years after Osborne’s speech, the Pensions Infrastructure Platform, which was created to try and unlock that £20bn, had raised just £1bn. By 2020, the platform was quietly sold to private equity firm Foresight.

But, as well as apathy over Hunt’s latest plans, there is also a feeling that the government is being a little heavy handed in its approach.

Indeed, in March’s Budget the chancellor went further than the comments he made at Mansion House, announcing a requirement for pension funds to report how much they have allocated to the UK. He suggested he would examine what further action might be taken if this reporting requirement did not lead to an increase in investments.

The move has drawn much criticism, with the government’s top infrastructure adviser, Sir John Armitt, telling attendees at the Trades Union Congress pension conference held in London in March that there is “no reason” a pension fund should be told it must invest in the UK.

Robin Powell, a campaigner for what he calls positive change in global investing and the author of the blog, The Evidence-Based Investor, agrees with Armitt.

“I’m uneasy about the politicisation of pensions since Jeremy Hunt moved into Number 11,” he says. “The government is treating pension funds as a quick fix for the UK’s ailing economic growth. But the primary objective of pension fund trustees is to ensure the best possible outcomes for members. It’s not their job to fund large infrastructure projects.”

The biggest problem with infrastructure, like private equity and venture capital, he adds, which the government also wants to promote, is its illiquidity. “Yes, in theory, this means higher potential returns, but it also means higher risk and higher costs. Another concern I have is that, if the chancellor has his way, pension funds will become too heavily exposed to the UK economy,” Powell says.

“Pension fund members already have high exposure to the UK, because they live, work and own property here,” he adds. “The evidence shows, time and again, that global diversification reduces risks and yields superior long-term returns.”

Show me the details

Hunt’s Mansion House speech and his later announcements during the Spring Budget in March, although long on aspiration, were also short on detail. Far from ideal for pension funds that have to cross the i’s and dot the t’s when it comes to their investment allocations.

The concern is that bluster has crowded out the finer details. Amin Rajan, chief executive of Create Research, an asset management consultancy, says: “Most previous government initiatives in this area have turned out, in hindsight, to be pious hot air.”

Maybe more information will become available if and when the latest initiatives get off the ground, he adds, but – until then – pension funds and their advisers will be reluctant to get involved to the extent the current government wants them to. “Infrastructure projects have a history of cost and time over- runs,” Rajan says.

“Such projects need catalytic investors, such as governments, that are willing to take the ‘first loss’ in order to leverage private capital. What has not been made clear is the role the UK government would take and what guarantees will be given to investors willing to invest in projects that have long gestation periods and an unpredictable policy regime.”

The Cabinet Office declined to comment.

Time, money and regulation

So what has been holding back investments in infrastructure among pension funds up until this point? In short, for defined contribution plans it is cost, while for legacy defined benefit (DB) plans, which are more or less closed to new money, it is time.

Matt Tickle, partner and chief investment officer at pension consultancy Barnett Waddingham, puts it simply: “Closed DB schemes will not be interested – the timescales are not consistent with liabilities, certainly not for new infrastructure projects. The long-time horizons required are just not compatible with their strategic objectives.”

Linda McAleer, senior investment research consultant at pensions advisory Hymans Robertson, adds: “Unless there is a shift in the DB landscape, we don’t expect much growth from this subset of pension funds.”

Meanwhile, the costs required to facilitate more expensive investments in roads or digital infrastructure, despite the potential for higher returns, are not suitable for workplace DC schemes, where employees are automatically enrolled and protected by cost ceilings.

Roger Pim, senior investment director of infrastructure at Abrdn, says: “Infrastructure is [in theory] an ideal investment asset class for pension funds given its focus on generating long-term stable returns, typically with a high degree of inflation protection and a low correlation to listed market volatility.

“But many of the UK’s DB schemes are closed to new investors, are moving towards buyout and so are unable to invest in new long-term asset classes, while the majority of the UK’s open pension plans are DC schemes and these are prevented from investing in illiquid infrastructure funds or assets due to the regulatory constraints.”

Furthermore, he adds, DC schemes have stringent cost caps that prevent investment in private assets, “even if they are anticipated to generate higher and more attractive risk-adjusted returns”.

Destination: Britain

Perhaps the most galling aspect of all this for Hunt is that overseas pension funds are choosing to invest big in the UK. Only last month Australia’s largest pension fund, Australian Super, announced it would place £8bn across a range of sectors, including the energy transition, digital infrastructure, mixed-use property and transport.

The latest allocation will take the pension fund’s total investment in the UK to more than £18bn by 2030, which includes more than £2.5bn in UK-listed equities. 
The pension fund’s chief executive, Paul Schroder, said: “Despite ongoing global economic uncertainty, the UK remains an attractive destination for global investors like Australian Super, which is evidenced by our forecast £8bn commitment to the market over the rest of this decade.”

The fund already has around £8bn invested in the UK, including a majority interest (74%) in the King’s Cross Estate in London; a 32% interest in Peel Ports, the UK’s second largest ports group that handles more than 70 million tonnes of cargo each year; a 50% joint venture with British Land to deliver the Canada Water Masterplan in East London, which will deliver up to 2,600 new net-zero carbon homes and 2.5 million square foot of workspace; and a 27% interest in Vantage Data Centers, one of the fastest growing hyperscale data-centre platforms.

All of this is in line with the pension fund’s goal for £7 of every new £10 it invests will be deployed outside of Australia. Surinder Toor, managing partner at Arjun, an asset management firm specialising in infrastructure, says: “As seen, there is strong demand for infrastructure assets among overseas pension funds but the interest from UK pension funds is severely lacking.

“Most pension schemes in the UK have virtually no infrastructure exposure compared to pension schemes in the Nordics, Australia and Canada that have allocations in the region of 15% to 20%. In fact, many UK defined benefit schemes are instead trapped in low-performing assets,” Toor adds.

Fallen idol

The timing of Hunt’s push is also proving a little awkward. Almost at the same moment the chancellor spoke to attendees at Mansion House, Thames Water – what should have been a poster child for infrastructure investment – was in urgent funding talks amid fears of collapse.

And, by the time Hunt had made his Spring Budget speech, one of the biggest investors in Thames Water, the Universities Superannuation Scheme (USS), had disclosed that it had written down the value of its stake by nearly two-thirds.

According to financial accounts published at the end of last year, USS’ investment is valued at around £360m, down from almost £1bn a year earlier.
 USS said in a statement: “While the value we place on our Thames investment may go up or down as part of our regular revaluations, we continue to view this as a long-term investment, in line with the long-term needs of the scheme.”

Elsewhere, the mothballed northern leg of the HS2 rail link also perhaps showed investors all too clearly how the government can lose its nerve and throw in the towel at a crucial stage of a flagship project.

They have not been the best adverts for infrastructure investing. When asked if pension funds have been discouraged by the controversy surrounding Thames Water, Arjun’s Toor says: “Yes, I fear they have.”

He adds: “Political sensitivity has deterred pension funds from large-scale investment in infrastructure projects, exemplified by Thames Water’s situation, where short-termism and political decisions at the time led to financial difficulties, deteriorating water infrastructure and risk of environmental harm.”

However, the underlying truth remains, he continues, that infrastructure assets need long-term investors like pension funds. “The £160bn invested in the water industry since 2010 was only achieved with the help of private investment.” he says.

Land of confusion

The final hurdle Hunt faces in his quest to get UK pension funds bankrolling the country’s infrastructure projects is whether the current government can be taken seriously.

A general election is fast approaching and, after 13 years of Conservative rule, Keir Starmer’s Labour Party has been continuously ahead in the polls for the past couple of years. According to the latest YouGov/Times voting intention poll, Labour leads with 44% of the vote, while the Conservatives have 19%.

Powell says: “True, Jeremy Hunt’s plans will come to nought if the Conservatives lose the election. But Labour are also talking about using pension funds to ‘reinvigorate’ the UK’s capital markets to boost investment in the UK economy.”

Barnett Waddingham’s Tickle is more optimistic. “Investors are already considering infrastructure and other private assets,” he says. “Asset managers and the industry are already innovating and looking at structures to help investors access these. This will continue regardless of the government [in power].”


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