UK pension airs water worries amid nationalisation fears

The Dorset fund questioned whether Hermes has an exit strategy if regulated assets in the country are taken public.

The UK-based Dorset County Council Pension Fund has questioned Hermes Investment Management over the possible renationalisation of assets held in its infrastructure funds, with the risk said to be its “biggest concern”.

The current political scrutiny of regulated assets, particularly in the water sector, was highlighted in a presentation by Perry Noble, partner at Hermes, a London-based investment management firm, according to documents released by the pension scheme last week. Noble is said to foresee “significant increased scrutiny of those assets” amid renationalisation pledges by the opposition Labour party and a tough pricing review being carried out by regulator Ofwat.

The pension fund subsequently enquired whether Hermes has an exit strategy should the nationalisation possibility become a reality, stating that “investor compensation was the biggest concern” for the scheme, which has invested in Hermes Infrastructure Fund I and II.

While recent disposals are not believed to have been in response to this specific risk, Hermes indicated to Dorset it had already reduced holdings in water companies and anticipates continuing to do so.

The company sold a portion of the 4.9 percent share it held in Anglian Water in December last year, reaping proceeds of about £60 million ($79.6 million; €68.2 million), according to a previous presentation by Hermes to Dorset. As at the end of September, Anglian Water had generated an 11.6 percent gross IRR for Hermes Infrastructure Fund I.

HIF I also holds a 3.9 percent ownership stake in Southern Water, with Hermes’ total managed ownership accounting for 21 percent of the UK water group, an investment which had generated a 10.9 percent gross IRR up to the same period.

In addition, Hermes sold a 4.36 percent interest in Thames Water to OMERS Infrastructure, in December, an investment held since 2012 on behalf of the BT Pension Scheme.

Separate reports from UK-based think tanks have placed the compensation bill for any future government nationalising the entire water industry at about £90 billion, although others have disputed the figure, arguing that Parliament would be able to decide the sum.

Hermes declined to comment further on what it disclosed to Dorset, while the pension fund had not responded to a request for comment at the time of publication.