The Association for Consultancy and Engineering has published a new report suggesting that £6 billion could be released for investment in infrastructure by consolidating the Local Government Pension Scheme. This would support the government’s long term ambition of funding more than £20 billion of investment from pension funds.
The report looks at the pensions sector in the UK, which is made up of a large number of relatively small public sector funds, while the UK’s private sector funds, though larger, are also relatively small by international standards. This makes investment in infrastructure difficult as each fund can allocate only so much of its funding to any one type of investment. Long term cultural change would be needed to ensure funds see infrastructure as an attractive investment, and consolidating funds, or providing mechanisms for funds to pool their finances, will be key to achieving that.
Nelson Ogunshakin OBE, chief executive of ACE, said: “There are around 4.6 million members of the Local Government Pension Scheme, which holds investments and assets of £120 billion. But fragmentation into 99 regional funds means that no single fund has the capacity to invest in a significant infrastructure project or asset. Creating a platform through which all 99 can invest just 5% of their funds into projects would result in £6 billion for infrastructure investment.”
The report also suggests that the creation of the government’s new Pension Investment Platform must be matched by efforts to provide certainty to pension funds and to help change the culture surrounding infrastructure investment. Funds appear to be more willing to invest in completed assets rather than investing to build infrastructure. Facilitating this would enable early phase investors, such as the Green Investment Bank, to re-invest in construction once their projects are completed.
Nelson Ogunshakin said: “Some of the largest pension funds in the world invest more than ten percent of their resource into infrastructure assets. This compares to lower levels in the UK, where the largest private fund, the BT Pension Fund, invests just 1.5%. Addressing concerns about risk, and reviewing regulations that limit funds’ exposure to infrastructure assets, would support cultural and structural change across the pensions industry over the long term. This review should also look at why UK funds are focused on covering their future liabilities, while other international funds give greater focus to maximising returns beyond meeting their liabilities. This is crucial to help pension funds to diversify their investments while generating the infrastructure investment needed to spur growth in the economy.”
Notes to editors
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To read the full report, please click here.
Pension fund investment in infrastructure – useful facts
The Canadian Ontario Municipal Employees Retirement System (OMERS) fund has 15% of its assets held in infrastructure1.
The Ontario Teachers’ Pension Plan (OTPP), which has been mentioned in a number of our papers, has approximately 7.4% of its asset held in infrastructure2.
The cBus pension in Australia has 12% of its assets in the (alternative) infrastructure field3.
GIC, one of Asia’s largest pension funds, has 10% of its assets held in private equity and infrastructure4.
The UK’s largest fund, the BT Pension Scheme (BTPS), has an infrastructure investment allocation of 1.5%5.
1 OMERS, Asset mix – 2012 (click here)
2 OTPP, Fast Facts – 2012 (click here)
3 cBus, Annual report addendum – 2010/11 (click here)
4 GIC, Annual report – 2010/11 (click here)
5 BTPS, Annual report – 2011 (click here)
Pensions and Infrastructure
This paper is the fourth in ACE’s infrastructure investment series and explores in more detail the current conditions within the market, and the implications they have on pension funds’ investment potential into infrastructure.
Paper 3 – Procurement in PPFM
Following the previous papers, this paper looked at how to improve the procurement of private finance for public sector projects across government.
Paper 2 – Public Private Finance Model: moving forward
This paper took lessons from the first paper and set out five new Public Private Investment Models that could help to improve on the experience of PFI.
Paper 1 – Performance of PFI: 1996-2010: lessons learned
This paper analysed data from 15 years of PFI contracts in order to learn lessons ahead of developing new investment models.
ACE’s infrastructure investment series
This series of papers examines how the UK can secure much needed investment in its social and economic infrastructure in the coming years.
Achieving this is important. Infrastructure has been highlighted as a primary driver for economic growth, as well as a means to deliver the UK’s goal of a hi-tech, low carbon and globally competitive economy. However, the UK is acknowledged to have both a shortfall in quantity (estimated by some at £434 billion1) and quality (the UK was recently ranked 28 for the overall standard of its infrastructure by the World Economic Forum2), hampering efforts to achieve these goals.
The timing of this series is also important in relation to proposed solutions to the UK’s infrastructure challenges. At the UK level, the National Infrastructure Plan is moving from its formative stage to delivery. Infrastructure solutions in the Devolved Nations are also taking shape, with examples, such as the formative Welsh Infrastructure Investment Plan being developed.
Developing sustainable models and sources of funding and financing for these proposed solutions, -especially in tough economic times with a restricted public purse- will require new thinking. Helping to identify these new models and sources of funding and financing and removing the blocks and challenges to them is the aim of this ACE investment into infrastructure series.
This series of papers will explore a range of options available to government as it looks to secure investment and raise the UK’s standing for infrastructure standards. These include the development of the Green Investment Bank, the potential for pension fund investment, new public-private finance models and alternative methods.
1 Helm, D, Wardlaw, J & Caldecott B, 2009, Delivering a 21st Century infrastructure for Britain, Policy Exchange
2 World Economic Forum Comprehensive report 2011-2012 (click here)
ACE represents the business interests of professional service providers in the built and natural environment in the UK. ACE is the leading business association in the sector, with around 600 firms employing 90,000 staff – large and small, operating across many different disciplines – as its members.
Those members are some of the world’s leading consultancy and engineering businesses. Renowned for the quality and excellence of their work, they regularly win awards for engineering innovation and achievement.
ACE’s powerful representation and lobbying to government, major clients, the media and other key stakeholders, enables it to promote the critical contribution that engineers and consultants make to the nation’s developing infrastructure.
ACE’s publications, market intelligence, events and networking, business guidance and personal contact, we provide a cohesive approach and direction for our members and the wider industry. In recognising the dynamics of our industry, we support and encourage our members in all aspects of their business, helping them to optimise performance and embrace opportunity.
Our fundamental purposes are to promote the worth of our industry and to give voice to our members. We do so with passion and vision, support and commitment, integrity and professionalism.
Author: Editor Gavin Pearson (firstname.lastname@example.org or 0207 202 0255)