US pensions struggle to define infra

A recent joint study by Harvard University and Hastings Funds Management has found that the $14tn US pension sector values infrastructure for its “defensive” aspects.

In a series of joint studies, research teams at Harvard University and Melbourne-based Hastings Funds Management have found that the $14 trillion US pension industry lacks a consistent definition for the infrastructure asset class, but is still seeking to increase its allocation to it by as much as 4 percent.

Each pension fund seemed to have its own ideas about what infrastructure included, but the most consistent characteristics US pensions assigned to infrastructure in the study’s survey included: “yielding income which is stable and predictable over the long term”, as well as being “basic”, “necessary”, or “crucial” to the economic functioning of a society. In other words, infrastructure is seen as a secure and defensive investment, according to Allan Wain, an investment team member at Hastings and co-author of the report.

Consequently, US pension funds have been trending towards allocating more of the balance sheet to infrastructure, with increases ranging from 1 percent to 4 percent, Wain told Infrastructure Investor. With an estimated $5 trillion to $10 trillion needed in infrastructure investment worldwide over the next decade, these increasing allocations will be critical to the public good, Wain said.

However, the central finding of the study was that US pensions don’t always include the same things under the heading of infrastructure. Some pensions limited infrastructure to just hard assets like roads or railways that have a direct impact on economic activity, while others also included social projects such as chains of hospitals or more business-like assets such as power plants.

“Given that there is such a variance, it really impacts how you calculate your asset allocation,” Wain said. “Their allocation to infrastructure may actually be more or less than what they say, depending on what is included.”

Wain continued that the onus was not only on the pension funds themselves, but on infrastructure investors and fund managers to be crystal clear about what they include within the asset class. For example, while Hastings itself may know exactly what “infrastructure” represents by its own definition, the pension funds it approaches can easily read their own definitions into that word without even realising the two parties are talking over each other.

“We as a firm need to be much more disciplined in our communication to institutional investors,” Wain said.

If the infrastructure asset class is not clearly defined, Wain is afraid that institutional investors like US pension funds will come to see the infrastructure sector as below optimal for investment purposes, and may decrease allocations to it.

“Those that have the financial capacity to make a difference will not participate in infrastructure,” he explained. “Instead, they will prefer to stick to sectors that are less important.” He pointed out that Hastings’ joint study with Harvard was a first attempt to achieve some clarity in this area.