Playing politics

Intentionally or otherwise, the prospect of forcing public pensions to invest in infrastructure was raised this week. Such talk is encouraged by politicians – but not necessarily welcomed by pensions.

At a recent conference in London, Mervyn Davies, the UK’s minister for trade, investment and small business, spoke of the need to attract a wave of new investment to help the UK meet its £500 billion infrastructure need over the next 10 years. And he made it clear that pensions were central to his thinking:

“My personal view is that the pension fund industry, with such enormous funds under management, is going to be critical to success.”

The speech perhaps invited more comment than Davies intended. An op-ed in the Financial Times, for example, pondered whether he was not so much inviting pensions to invest in infrastructure as telling them that they must. 

Although it’s far from clear that Davies intended to imply such a thing, it’s obvious that tapping those vast pools of public pension capital must be highly seductive to politicians. For one thing, it means governments don’t have to dig so deep into their own pockets at a time of stark budgetary deficits. Second, as long as the pensions are investing directly, it keeps treasured assets out of the hands of those controversial, returns-focused private equity-type investors.

But what’s politically desirable may not be quite so alluring to the pensions themselves. They, after all, have a fiduciary duty to act in their policyholders’ best interests. If this happens to coincide with the best interests of government – and maybe even society as a whole – then all to the good. However, they would surely resent and resist any attempt by government to relinquish control of the purse strings.

If this is indeed interpreted as the way the wind is blowing, smart pension funds will likely be discussing ways to avoid political pressure. One way of doing this may be to follow the strategy being developed by OMERS of teaming with other pensions to create large, global pools of capital effectively resistant to national governments – and their self-interested agendas.