Groundwork: The respect pensions deserve

“Global inflation fears reach new heights” ran a recent headline in Canada’s Globe and Mail. Meanwhile, in the UK’s Financial Times, legendary investor Jim Rogers was offering the following view: “There has been inflation but the US and UK governments lie about it … Money all around the world is becoming more and more debased so you need to own real assets.” Could pension funds possibly need any more motivation to pile into the inflation-busting, asset-owning infrastructure asset class?

The question is relevant because many still wonder about the commitment of pension funds to infrastructure. A burning issue today is whether pension funds rather than banks should be the long-term holders of infrastructure debt. This will be the subject of a no-doubt animated ‘Big Debate’ at our Infrastructure Investor: Europe forum in Berlin in mid-March. It’s certainly true that the capital markets conundrum of who provides long-term finance for infrastructure is exercising minds everywhere – witness our recent exclusive on the launch of a new state-backed securitisation vehicle in France that will refinance public-private partnership debt post-construction without exposing institutions to project risk.

But before the pensions are condemned for their failure to give infrastructure the financing boost it needs, let’s look at a few other salient points. In the first Infrastructure Investor 30 survey last year – which ranked the world’s largest infrastructure investors by capital raised over a five-year period – three of the top 10 (Borealis, Caisse de Depot et Placement du Quebec and Ontario Teachers’ Pension Plan) were pension funds. Canada Pension Plan Investment Board (CPPIB) was just one place outside the top 10.

As direct investors, it’s clear that pension funds have been making their mark for some time – and it’s a trend that appeared to gather speed in 2010. Among the most notable direct deals by pensions during the year: Borealis/Ontario Teachers’ £2.1 billion (€2.4 billion; $3.3 billion) acquisition of the UK’s High Speed 1 rail link to the Channel Tunnel; CPPIB’s A$3 billion (€2.2 billion; $3.0 billion) swoop for Intoll, the Australian toll road operator; Alberta Investment Management Corporation’s purchase of a 50 percent stake in Autopista Central, the Chilean toll road firm; and the California Public Employees’ Retirement System’s acquisition of a 12.7 percent stake in Gatwick Airport, owned by Global Infrastructure Partners.

A point to consider is that lying behind the criticism of pensions’ alleged inactivity is most likely the question “what can pension fund involvement do for me?” For these critics, the tendency for pensions to try and make money for themselves and their policy holders by going the direct route is not relevant – or possibly an annoyance. Far better, the cry comes, if all this capital were headed into infrastructure funds instead. 

Lower cost

In fact, as a survey by Towers Watson and the Financial Times discovered last year, pension commitments accounted for $109 billion of the $179 billion of assets held by the world’s top 50 infrastructure funds in 2009 (a whopping 61 percent of the total). Some of the fund managers in the survey – such as Australia’s Industry Funds Management and the UK’s Hermes Fund Managers – only manage assets on behalf of pension funds.

Pensions are also seeking innovative, lower cost ways of accessing infrastructure funds. PGGM’s arrangement with developer Lend Lease is in effect a kind of halfway house between direct and fund investing. This doesn’t indicate a wholesale shift away from conventional funds – such arrangements will only ever be ad hoc and most investors could not get the diversification they require by limiting themselves only to the developer fund universe. It does indicate that pension funds’ engagement with infrastructure continues to expand into new areas.

Infrastructure is a young asset class that may see accelerated growth as inflation fears stalk the global economy. Expect to see pension funds deepen and broaden their activities within this asset class. Contrary to the impression that may have been created, they already have a very solid platform.