Sgt. Osborne’s pensions club band

YOU KNOW WHAT’S great about the Beatles’ catalogue? It’s prolific enough that you can find a song title to fit almost any subject – even something as prosaic and decidedly un-lyrical as getting UK pension funds to invest in the country’s infrastructure.

Just take a look at Chancellor George Osborne’s late November signing of a memorandum of understanding with the National Association of Pension Funds (NAPF) and the Pension Protection
Fund – two UK industry bodies representing over 1,200 pension schemes, whose members hold in excess of £800 billion (€931 billion; $1.2 trillion) of assets.

LENGTHY COURTSHIP

The agreement, following a lengthy courtship by the government, calls for the “development
of a new pension fund infrastructure platform to help pension funds invest more in infrastructure”. The official announcement generated an encouraging, All You Need is Love response from NAPF, with chief executive Joanne Segars enthusing that “this could be a real win-win” and that NAPF’s members are “excited by the government’s commitment”.

It wasn’t all Words of Love though, with NAPF pointing out that “the current investment model [read PFI] makes it difficult for [pensions] to invest efficiently in infrastructure”. But there was a definite We Can Work It Out quality to the whole announcement, with Segars saying that “we look forward to working on the details with [the government]” and Chancellor Osborne telling the BBC that “we are hopefully going to change” the lack of UK pension fund investment in UK infrastructure.

Cannily, Osborne preceded his official announcement of the pension agreement with a pledge to reform the UK’s Private Finance Initiative (PFI), the country’s standardised procurement model for public-private partnerships. The idea is to turn Labour’s much-maligned procurement process into a cheaper, more transparent, ‘pension-friendly’ model.

The good news is that, while it may take some time to devise a framework that will allow pensions to feel comfortable with investing in infrastructure, the reform process shouldn’t turn into The Long and Winding Road. That’s because the government is desperate to kick-start the economy in the face of a double-dip recession and has a vested interest in getting pension money in the ground sooner rather than later.

At press time, though, the mechanics of how the government will entice pensions is still a Magical Mystery Tour. What exactly is the “new pension infrastructure platform” NAPF alludes to in its
statement? Is it the rumoured “pension infrastructure fund”? And if so, how will it work? Also, will pensions be asked to shoulder construction risk? The list of questions could go on and on.

The answers to these and other questions will be crucial, though. Pensions have
a fiduciary duty to their clients – the When I’m Sixty-Four club – and pensioners will be at the forefront of their minds when managers are called upon to participate in the UK’s National Infrastructure Plan.

What pensions like about “projects like ports and power stations [is that they] can offer
a reliable return over a long timeframe,” Segars commented. This means the government will
have to come up with a list of projects that fit the bill. In short, these projects cannot be Junk,
otherwise pensions will stay well clear.

Fortunately, there are encouraging signals, with a lot of talk about economic infrastructure, such as toll roads and ‘toll lanes’ to counter Britain’s congested roads network and new energy projects. There was also talk that the National Infrastructure Plan will establish a decade-long roadmap, providing the sort of certainty institutional investors crave. But of course, only time will tell.

On the downside, there is a bit of a Fixing the Hole flavour to the whole initiative. To put it bluntly, the only reason we are hearing about this is because the government desperately needs to stimulate
growth and create jobs without spending its own money (which it doesn’t have anyway). That’s arguably not the most promising start to a programme which should generate the sort of thought-out,
long-term infrastructure investments pensions are hungry for.

Still, the Chancellor can already claim one important victory:  he’s managed to capture the attention of the UK’s pension community. He’s entitled to claim things are Getting Better.