It’s hard not to look at Chancellor George Osborne’s grand plan to turn pension funds into mainstream financiers of infrastructure without smiling.
After all, Osborne’s coalition government has been a vociferous critic of the Private Finance Initiative (PFI). Originally a child of the Conservative party, PFI committed the unpardonable sin of growing up in a Labour house. For that crime, it has been disowned by its progenitor and mercilessly whipped in the court of public opinion.
It’s worth bearing this in mind because, to all intents and purposes, Osborne’s announcement that UK pension schemes are to fund up to two-thirds of a growth-boosting £30 billion (€35 billion; $47 billion) infrastructure programme is nothing less than the beginning of PFI Mark II. In fact, replace ‘Private’ with ‘Pension’ and you can even keep the acronym.
With banks in terrible shape, pensions have become the Great White Hope of infrastructure financing – and for good reason. They offer a captive pot of low-cost capital that can stay invested for many years. And infrastructure offers the perfect opportunity to offset pension liabilities. As Joanne Segars, chief executive of the National Association of Pension Funds, put it: “This could be a real win-win”.
Note the use of the word ‘could’ though. Presently, “pension funds struggle with the mechanics of investing in infrastructure,” Segars said. It’s now up to the government to remedy this. But first, it has to decide what it wants from pensions.
Does it want them to provide equity or debt for its programme; or both? Debt and equity are different propositions. The former has been hard for pensions to stomach without some form of insurance or guarantees. The latter is more palatable, but who will provide the still-necessary debt?
Pensions also need regulatory certainty and assurances that their returns will not be tampered with. Another important question: at what stage does the government want pensions to come into the programme? Is it from the very beginning, including funding asset construction? If so, pensions will again need some form of (potentially expensive) government guarantee.
Or does the government plan to build these projects with taxpayer money and then sell them on to pensions? That might work for some projects, but it’s hard to see it working for assets like schools – unless the government is willing to guarantee revenue streams, using PFI’s availability structure. Also, it will be crucial for these assets to be commercially attractive.
Clearly, the government is getting some things right, such as the decade-long horizon of the National Infrastructure Plan. But it will have to get many other things right for this initiative to really take off.
And even if it does, what’s to stop a future Labour government from consigning Osborne’s Pension Finance Initiative to the same inglorious fate as PFI? It would be rash to underestimate the impact differing political agendas could have over the next ten years.
After all, like any new scheme, Osborne’s pension contracts are likely, when scrutinised down the line, to yield the same sort of value-for-money complaints the current government has lobbed at PFI.
Without cross-party support for this proposal, institutional investors should tread carefully. This is an initiative, not as yet a plan.