North Rhine-Westphalia issued its ‘Decree on the Introduction of an Infrastructure Quota’ in early 2021. The decree breaks new ground because local pensions are allowed, for the first time ever, to apply for a separate infrastructure quota of up to 5 percent for their portfolios. This reform is meant to allow state-supervised pensions to increase their maximum infrastructure exposure in these challenging times, which are characterised by low yields in fixed-income asset classes. Furthermore, investments within this infra quota will not be offset against other regulatory real asset and alternative quotas in the investment ordinance.
North Rhine-Westphalia has thus taken the initiative on a topic that has been widely discussed for years and, in the process, has become something of a national pioneer. This step was long overdue and is greatly appreciated. In light of the pandemic and the accompanying economic stimulus measures, interest rates are unlikely to rise in the near future. For some time, it has barely been realistic for the pension and insurance industries to achieve target returns by relying too much on fixed-income investments.
For this very reason, the longstanding separate real estate quota for pensions was suspended in 2020. After all, real estate is one of the few remaining investment classes that can offer attractive returns, even in a low interest rate environment. By way of example, the residential market rocketed during the pandemic. Infrastructure, similarly, has the potential to offer such yield relief.
In addition to underlining infrastructure’s proven status as a higher-yield and low-volatility asset class, the decree is explicitly intended to promote sustainable investments in transport as well as energy generation, storage and grid infrastructure. This goal is, of course, very much in line with the EU’s Green Deal and taxonomy. Consequently, urgently needed additional institutional capital reserves can be deployed to achieve climate protection targets by allowing for a higher allocation in infrastructure assets.
“In the longer term, a more generous or flexible quota will be needed”
The successful application for the quota is, however, dependent on various criteria that will be rigorously checked by the supervisory authority. These include an increased reporting obligation, the integration of a sustainability strategy, and stricter risk management. These criteria should not be seen as additional burdens, seeing as much of the new reporting standards are already being implemented as a result of the EU taxonomy and related provisions.
A 5 percent quota is a good start, but there is room for improvement. In the longer term, a more generous or flexible quota will be needed. North Rhine-Westphalia has opened the door and it would be highly desirable for other German and international jurisdictions to follow suit.