Welcome to the UK’s IFM

Now that’s more like it. What started life as a politicised UK government initiative to pump UK pension money into UK infrastructure seems to be developing in a much more interesting direction: the creation of a platform that will pool resources from the highly fragmented UK pension market and target investments across different sectors and – more importantly – different geographies.

The Pensions Infrastructure Platform (PIP) started life thanks to a memorandum of understanding between the Treasury and two pension bodies – the National Association of Pension Funds and the Pension Protection Fund.

The idea behind it, at least as far as the UK government was concerned, was to get more UK pension money into UK infrastructure, with local politicos complaining about the lack of national pension investment compared to the amount of foreign institutional money flowing into UK assets.

DISCOURAGING

But there was a definite whiff of ‘British pensions for British infrastructure’ about the whole initiative that threatened to discourage the very investors the PIP hoped to attract. As one local pension fund manager told Infrastructure Investor some time ago: “We do feel that investing in infrastructure has to be a global play and the UK proposal rules that out.”

What emerges from the minutes recording the Strathclyde Pension Fund’s £100 million “soft commitment” to the PIP, however, reveals a much more attractive proposition, one that is still tied to the UK government’s infrastructure plans, but not married to them.

According to the Strathclyde documents, the PIP is now shaping up to be the UK’s answer to Australia’s Industry Funds Management (IFM): a scheme “run by pensions for pensions,” preferably with a not-for-profit, in-house management team – “with incentives aligned with the interests of the pension funds” – targeting a fund size of £2 billion and returns of between 2 percent and 5 percent above the retail price index over a 25-year period.

More importantly, the PIP will seek to diversify its investments, with “limits on amounts to be invested, for example, in various geographies or sectors, and a minimum level for investment in the UK,” the Strathclyde documents reveal, adding that “a likely source of opportunity for the PIP will be the National Infrastructure Plan published by the UK government last year”.

Having “a minimum level for investment in the UK” and using the National Infrastructure Plan for pipeline building is, however, a world away from a platform designed to pump pension money into UK infrastructure. And the Strathclyde documents seem to further distance the PIP from this idea by pointing out that the scheme is modelling itself on Australia’s IFM – a global investor owned by 32 Australian superannuation funds, with some £6.8 billion of infrastructure assets.

This is good news, because, as David Denison – the former chief executive of the Canada Pension Plan Investment Board (CPPIB) – said recently, the UK pension market lacks the necessary scale for infrastructure investment and needs to consolidate if it wants to be a player in the asset class.

“Absent this scale, it is hard to envision the other necessary [criteria] for success, namely strong, professional governance,” Denison added.

What emerges from the Strathclyde documents is a PIP trying to position itself with precisely the type of scale and governance that Denison suggests.

The bad news, at least for general partners (GPs), is that the PIP seems to be coming to life to address many perceived shortcomings with the traditional infrastructure fund model.

In the Strathclyde minutes, there is a two-column, four-row table listing the sort of issues that have prevented UK pensions from investing in infrastructure. Two of the complaints are the ‘2 and 20’ fee model employed by some GPs and overly leveraged infrastructure deals, “which reduce the inflation-linkage pension schemes are looking for”.

In essence, the 10 to 12 founding members of the PIP, which is expected to open for business in January 2013, are saying they want to invest in infrastructure as an asset class, but feel strongly enough about the inadequacy of the products on offer to create their own, custom-built infrastructure fund.

That’s a better raison d’être than some vague and misguided ‘national interest’ platform. But it’s a stinging indictment of how existing products are perceived by new entrants to the asset class.