Governments key to unlocking pension investment in infra

Pension funds need governments to create or remove regulation to help channel more investments into infrastructure, the OECD said in a recent note. At the moment, less than 1% of pension funds worldwide are invested in infrastructure.

Institutional investors – such as pension funds and insurance companies – held over $65 trillion under management at the end of 2009, but infrastructure investments still make up an infinitesimal portion of their allocations. For that to change, governments have to step in with incentives and regulatory changes.
At least that’s what the Organisation for Economic Cooperation and Development (OECD), the economic policy group for the world’s developed countries, has suggested in a recent policy note on promoting long-term investment for institutional investors. At the moment, the OECD estimates that “less than 1 percent of pension funds worldwide are invested in infrastructure projects”.
For pensions to be able to significantly contribute to the funding of an estimated $50 trillion of infrastructure needs by 2030 (OECD estimate), governments will have to “help investors address long-term risks”; create a “transparent environment for infrastructure investment”; implement a “stable and accessible programme of infrastructure projects and public-private partnerships” (PPPs); and provide “appropriate investment incentives and risk transfer opportunities”.
The biggest constraint to more pension fund investment in the asset class is “the limited number and sporadic nature of investment opportunities in the infrastructure sector,” states the OECD. “Investors need a better sense of the government’s infrastructure plans beyond the political cycle,” adding that “government should support the development of national long-term strategic policy frameworks for individual key infrastructure sectors”.
In a nod to the shifting moods of successive governments, the OECD notes that “the regulatory environment for such initiatives should also be stable, helping to cement the credibility of the government and the trust of institutional investors in the government’s commitment to pre-set rules”.
Another important role for public authorities is to help pensions become more comfortable with the risks of infrastructure investing “through appropriate financial incentives (for instance, tax incentives and feed-in tariffs) and risk transfer mechanisms (such as guarantees and first equity loss on investments)”.
Echoing complaints by several limited partners (LPs), the OECD calls for more transparency to infrastructure investing and more quality data on the sector, suggesting governments have a part to play “through independent data collection and common performance measures”.
Still, the organisation recognises that governments are not the only parties to blame for the current state of affairs. The relative youth of infrastructure as an asset class is also a factor. But so is the fact that “even supposedly long-term investors such as pension funds end up having portfolio turnover much greater than originally intended”.