UK pension funds need more time to develop the skills needed to invest in infrastructure, says expert

Responding to a report (24-page / 725KB PDF), by lobbyists the Confederation of British Industry (CBI), Graham Robinson of Pinsent Masons, the law firm behind Out-Law.com, said that it would be a "major challenge" for pension funds to invested in the UK's "creaking infrastructure" in the short term. International sovereign wealth funds were a more likely investment source, he said.

"Funding of UK infrastructure by sovereign wealth funds in the Middle East and Asia are likely to increase substantially over the next few years, particularly in China as it seeks investment outside its own domestic market and the Chinese economy and investment in its own domestic infrastructure slows," he said.

However, he added that the CBI's focus on increased spending on infrastructure as a means of stimulating growth in the UK economy "offer the beleaguered construction sector a lifeline". UK construction activity contracted at 4.8% during the first quarter of 2012 according to the Office of National Statistics (ONS), while the International Monetary Fund (IMF) has called for the Bank of England to stimulate growth through further cuts to the baseline interest rate or increasing its programme of quantitative easing (QE). The Bank's Monetary Policy Committee has purchased an additional £125 billion in Government securities through its QE programme since October, but has held the interest rate it charges other banks to lend money to them at 0.5% since March 2009.

"Further falls in construction output are likely during 2012, meaning the UK economy will struggle to recover and a 'Plan B', as outlined by the IMF, will become more likely," Robinson said. "Investment in construction offers one of the best opportunities to stimulate the UK economy as, apart from a greater economic multiplier, the construction industry supply chain is almost entirely UK-based as opposed to, say, the automotive sector where components and supply chain are often sourced from outside of the UK."

More investment in construction would also stimulate the manufacturing sector, he said, as approximately 20% of the UK's manufacturing sector produces building products and equipment.

The Government identified £250bn worth of infrastructure investment opportunities as part of its National Infrastructure Plan last year; however it has acknowledged that much of the money will need to come from the private sector.

In its report the CBI recommends that pension funds look to build up "in-house skills" through partnerships with more experienced players in the market, including Government for some projects. It also suggests that smaller pension funds pool their assets to create wider investment opportunities, whether through the Treasury's proposed Pension Infrastructure Platform or independent models.

The body also calls for the Government to commit to a more "commercialised" approach to encourage investors, including seconding managers from the private sector, creating a single "access window" for investors and publishing an exhaustive pipeline of upcoming work. It must also work to mitigate some of the investment risks as a way to attract private sector investors, for example by spreading public funds across a number of projects as a way of reducing credit risk rather than fully funding a smaller number of individual schemes. Enhanced credit ratings on so-called 'greenfield', or brand new, projects in particular could, the report said, make these projects viable investment opportunities.

The Government must also ensure that forthcoming European legislation such as the Solvency II Directive, which introduces minimum capital requirements for insurers, will not prohibitively drive up the cost of investment in infrastructure, the CBI said. In addition, the domestic tax regime should also encourage investment through "simplicity and predictability". It suggested extending capital allowances to all infrastructure projects, and the introduction of a dividend tax credit for pension funds targeted purely at new projects.

"If we want to see the billions of pounds needed to upgrade our aging infrastructure and secure jobs and growth for the long-term, the Government must make smarter use of limited public finances," said CBI Director-General John Cridland. "By underpinning and lifting the credit rating of certain infrastructure assets, it can make them less risky and more attractive to investors. If we can capture just a fraction of the £1.5 trillion of capital held in UK pension funds, and invest a further 2% of their total assets in infrastructure, this would make a huge contribution to renewing our energy, transport and other infrastructure."

Joanne Segars, chief executive of the National Association of Pension Funds (NAPF), said that pension fund managers were often put off infrastructure investment by risk fears, skills gaps and investment fees, but remained "eager to get more involved".

"We are well underway with the development of a new Pension Infrastructure Platform to help bring pension funds large and small to the table," she said. "Many of the CBI's concerns about skills, scale and investment viability are well known to pension funds, and the PIP will help address them."