In his recent speech at the Conservative Party Conference, the Chancellor of the Exchequer, George Osborne, reiterated the UK Government’s desire to see greater investment in UK infrastructure projects from UK-based pension funds. It is widely acknowledged that the UK trails behind its counterparts Australia and Canada in this regard. Of particular interest to Osborne is likely to be the 127 UK-based pension funds not investing in the asset class whose aggregate assets under management (AUM) total more than £4.6tn. Stimulating investment from these sources is seen as key to replacing ageing and inadequate infrastructure within the UK. In aid of this, Osborne has announced the creation of a National Infrastructure Commission to coincide with the planned pooling of 89 local government pension funds into six British Wealth Funds.
Preqin’s Infrastructure Online service currently tracks 145 UK-based public and private sector pension funds that are either investing or considering investing in the infrastructure asset class. These pension funds have aggregate AUM of more than £7tn and allocate approximately 3.6% on average of total assets to infrastructure, below their average target allocation of 4.8%. However, the proportion of capital allocated to infrastructure still falls below that of other alternative asset classes.
Among the public pension funds tracked by Infrastructure Online, the London Borough of Barking & Dagenham Pension Fund maintains the highest current allocation to infrastructure as a percentage of its total assets, at 10%. However, the level of AUM for this pension fund provides an indication as to why the pooling of local government pension funds has been proposed in order to overhaul and drive UK infrastructure financing; at just £740mn, the pension fund’s £74mn allocation is unlikely to unlock any large scale infrastructure projects on its own, preferring instead to invest through unlisted and listed infrastructure funds.
Additionally, the largest UK-based public pension fund investing in infrastructure is Lancashire County Council Pension Fund, with a £420mn invested in infrastructure. Again this is a relatively small amount considering that private sector pension fund Universities Superannuation Scheme maintains a current allocation to infrastructure of £2.3bn. However, the scheme currently has only five direct infrastructure investments in the UK and less than half of its infrastructure fund commitments concern UK infrastructure assets. Comparatively, Canada-based pension fund Ontario Municipal Employees Retirement System (OMERS) has an allocation to the asset class of approximately 20% of total assets, or CAD 14.4bn. In 1999, OMERS set up Borealis Infrastructure to invest in and manage infrastructure assets on behalf of the retirement system and are now one of the largest institutional investors in infrastructure worldwide. Furthermore, Borealis now manages the infrastructure investments of multiple public and private sector pension funds, with over $12bn committed.
It is clear that more needs to be done in order to convince more UK-based pension funds to invest in domestic infrastructure projects. With suitable projects and a stable market, untapped billions in pension funds that have never invested in the asset class can potentially be utilized, as well as the increased allocations of existing investors. This, combined with moves to pool pension fund assets, could act as a catalyst for unlocking infrastructure projects in the UK and beyond.