Treasury turns to pension funds for infrastructure investment

The private finance initiative (PFI) model is one of the most common ways for public bodies to procure funding for major public infrastructure projects such as roads, prisons and schools. In a PFI agreement, upfront costs are paid by the private sector and are typically repaid by the taxpayer over a 30 year period.

However last week the Financial Times reported that troubled banks were being discouraged from taking on long term finance deals due to new global capital rules as well as increasing pressures on eurozone debt.

Pension funds and insurers, which need long-term investments to match their long-term liabilities, present an ideal means of meeting the resulting 'funding gap', the paper says.

The Financial Times report suggested that pension funds in the UK lack the risk management processed allowing them to assess how best to invest in infrastructure projects, and the Treasury is now discussing what might be done to encourage or enable them to do so.

"We are talking to the pension funds to see if there is anything we might be able to do to help. It is something we are looking into. But it is early days," a spokeswoman from the Treasury told Out-Law.com.

Trustees of pension schemes are legally obliged to make any investment decisions with the schemes' beneficiaries interests in mind, and may be liable for damages if they do not do so.

Pensions law expert Simon Tyler of Pinsent Masons, the law firm behind Out-Law.com, said that encouraging pension funds to invest in long-term infrastructure projects was "welcome".

"Only the larger pension schemes will have the resources properly to assess the investment risks and rewards. But many will be keen to get involved," he said.

Infrastructure investment is being seen by the Government as a means of encouraging growth in the faltering economy. It recently announced a new infrastructure development fund which will reserve half a billion pounds to "kick start" the economy in local areas.

In a speech on UK economic growth at the London School of Economics last month Deputy Prime Minister Nick Clegg said that the Government would "hand pick" and "rigorously examine" up to 40 of the biggest infrastructure projects to remove funding obstacles.