Race to the bottom

It’s always tricky commenting on big political announcements. Ambitions are usually grandiose, but practical details sketchy; ideas are half-formed; information tends to trickle down through carefully placed leaks; and the temptation to draw definitive conclusions from a partial picture is ever present.

So it’s with some trepidation – not to mention restraint – that we sifted through the latest round of rumours and leaks concerning UK Chancellor George Osborne’s ‘Pension Finance Initiative’ – the Treasury’s grand plan to get UK pensions to fund UK infrastructure to the tune of £20 billion (€24 billion; $32 billion).

Concrete details

With a new budget announcement just around the corner, some concrete details about the scheme have finally started to emerge, and what they reveal is certainly interesting, especially for infrastructure general partners (GPs). Because at the heart of Treasury’s pension plans lies what is effectively a low-cost GP designed to provide UK pensions with access to UK infrastructure.

Known as the Pension Infrastructure Platform (PIP), the new vehicle is shaping up to be a pension-owned GP that will pay no more than 0.5 percent in management fees and will be seeded by what Geoffrey Spence, the head of Infrastructure UK, called a “hard core of enthusiasts”.

Speaking to IFAonline.co.uk, Spence said that “pension funds themselves would pay for the management directly, in the sense that they would own their own fund manager, and would work closely with government to facilitate the financing of infrastructure projects going forward in the UK”.

The rationale for this, the Infrastructure UK boss goes on to explain, is that “one of the relationships that seems to have gone downhill as a result of the credit crisis has been the relationship between pension funds and traditional fund managers in the UK, particularly in the infrastructure space”.

To which Alan Rubenstein, chief executive of the Pension Protection Fund, one of the trade bodies that has signed up to the government’s plan, added in the Guardian: “One thing pension funds have told us is that they don’t like unnecessarily costly fee structures.”

In short, the Treasury is hoping to exploit alleged pension discontent with costly infrastructure GPs – and increasing pension appetite for infrastructure as an asset class – by providing these schemes with what it sees as a low-cost alternative to the traditional infrastructure fund. That’s take-away number one.

Take-away number two, hinted at by Spencer’s “hard-core of enthusiasts” reference, is that while the government may want UK pension funds to channel up to £20 billion to UK infrastructure via the PIP, that figure is somewhat aspirational and, even in a best case scenario, will take some time to reach.

Instead, what the grapevine is telling us is that the PIP will launch with a rather more modest £2 billion when it officially opens for business in January 2013. But even that figure is also somewhat hopeful, considering it will be split into £1 billion from the “hard-core of enthusiasts” and £1 billion from other investors.

To reach the £20 billion watermark, Chancellor Osborne proclaimed, will take some work, especially since the PIP already carries some hefty caveats – chief among them its lack of geographic diversification. As one local UK pension fund told this column last month: “We do feel that investing in infrastructure has to be a global play and the UK proposal rules that out.”

But that’s not the only deterrent. As First State’s Niall Mils recently put it: “The UK National Infrastructure plan promotes investment into greenfield assets. Such assets have a very different type of risk profile to well-established, brownfield investments, with high capital costs, delayed returns and illiquidity forming an extra layer of risk.”

It’s a fair point and neophyte UK pensions looking at the space will have to ask themselves: Do they want to opt for a new platform, geographically concentrated and with perhaps higher risks? Or will they choose more traditional fund managers with a proven track record, diversification, and a lower-risk game plan?

At present, the strongest carrot the Treasury seems to be dangling in front of pensions is the PIP’s low cost. Whether that will be enough to convince them to overlook the platform’s other disadvantages remains to be seen. Twenty billion pounds of capital hinges on the outcome.