“Today’s announcement by the Chancellor to attract investment from British pension funds to build new infrastructure is an important move and could help the UK grow its way out of its current economic problems. There remain a lot of details to be decided, but if a holistic solution can be found that benefits the State, pension funds and the workforce building these projects, then it should be a success.
On the type of schemes that will invest
“If pension fund infrastructure investment is going to work in practice, then it will require more than just a copycat approach of projects abroad. Importing models that have worked overseas won’t necessarily work as there are important UK-specific considerations.
“In particular, many UK final salary schemes are closing or closed. These schemes are more likely to need streams of annuity income rather than equity exposure. Any infrastructure deal needs to be structured in this way to maximise its usefulness for schemes. The alternative group of Defined Contribution pension funds are not yet mature enough so few currently have sufficient investment scale, though this may change in future.
On the fees involved in any such scheme
“The level of fees involved is also critical. The agency costs of intermediaries need to be controlled. Many infrastructure products involve a large chain of agency costs orientated to financial engineering rather than operational management, which diminish returns to investors.
Therefore, successful infrastructure investment requires tight budgetary control and stretching targets in both construction and operational phases in order for it to be successful.
|
