Fortnightly meetings to hammer out UK pension framework

The Treasury, the National Association of Pension Funds and the Pension Protection Fund are to meet twice a month to work on a framework that will allow local pension funds to increase their average 2.5% allocations to infrastructure. An announcement is expected with the 2012 Budget, in the spring.

A declassified copy of the memorandum of understanding signed between the UK Treasury, the National Association of Pension Funds (NAPF) and the Pension Protection Fund (PPF) reveals the parties plan to meet fortnightly to hammer out a strategy on how to increase pension investment in UK infrastructure by the time the 2012 Budget is unveiled in the spring.

According to the memorandum, the UK needs to spend over £170 billion (€205 million; $265 million) to develop its infrastructure over the next five years, with “the vast majority of [the funding] to be provided by the private sector,” the document states. 

In order to help the government meet its goal, a framework will be developed that will hopefully allow pensions to increase their allocations to infrastructure from an “historic average” of 2 percent to 2.5 percent of their total portfolios. It has been widely reported that the new framework should help unlock some £20 billion in new pension money.

Chancellor George Osborne unveiled a decade-plus roadmap of 500 infrastructure projects across road, rail, energy and broadband last November, pledging to “establish a platform to facilitate increased pension fund investment in infrastructure”. He noted that, “historically, institutional investors, and pension funds in particular, have tended not to play a major role as direct investors in infrastructure assets”.

The agreement signed with the NAPF, whose members manage some £800 billion of assets, and the PPF is part of this broader engagement with the institutional investor community. 

Separately, the government has also signed an agreement with a group of fund managers and institutional investors – including Meridiam, Hermes, the Greater Manchester Pension Fund and the London Pensions Fund Authority – “to develop proposals for more early stage institutional investment in greenfield infrastructure”. This group of investors has about £50 billion of assets under management collectively.

Another potential source of capital might come from life insurers. To this effect, the government has teamed up with the Association of British Insurers (ABI) “to explore ways to ensure that the capital markets continue to provide an efficient and attractive source of debt finance for infrastructure”. 

Otto Thoresen, ABI’s director general, said ABI wants “to work with the government to create a new asset class of infrastructure bonds which could see insurers investing in everything from railways to new hospitals”.

The final piece of the funding puzzle comes in the form of foreign sovereign wealth fund money. The $410 billion China Investment Corporation has already expressed an interest in investing equity in UK infrastructure.