It is estimated that pension funds in the UK currently have roughly 2 per cent of their portfolios invested in infrastructure assets. In contrast, countries such as Australia and Canada tend to have a higher exposure of around 5-10 per cent.
This is in part due to their longer experience with compulsory defined-contribution plans and the time required to create an infrastructure capability and expertise within a team. In Australia investors and their employers have been mandated to contribute towards a ‘superannuation’ fund since their introduction in 1992.
On the retail side, interest has been spurred by both the Retail Distribution Review (RDR) which permitted advisers to make recommendations for investment trusts and pension freedom rules implemented in 2015 that allow greater choice of how to receive an income during retirement.
Infrastructure funds or investment trusts can be sometimes be large and well diversified, but more often they are focused on specific types of investment, for example types of property (student accommodation, retirement homes) or renewables and solar panels. The more specific the exposure the higher the level of due diligence that should be carried out.
Future infrastructure pipeline
Despite this complexity, the current investment landscape is there is plenty of capital chasing a relatively small amount of infrastructure projects. This is particularly evident for retail money with many UK investment trusts trading at a premium to net asset value (NAV).
Within the UK, the government publishes its pipeline of planned infrastructure projects including both public and private sectors. The current pipeline indicates £400bn of new infrastructure spending, with private sector funding accounting for roughly £250bn of this amount. Energy and transport projects account for roughly 90 per cent of the total.
Meanwhile, another £35bn of investments associated with existing infrastructure will be coming to the market over the next 5 years, for example the National Grid Plc is lining up the UK gas distribution network for sale.
The creation of the Pensions Infrastructure Platform (PIP) in 2011 is helping to increase the level of pension investment in infrastructure.
In particular, it aims to invest in projects suitable for pension funds that are stable, inflation linked, low leverage and with long-term time horizons. So far roughly £750m of investments have been made via this platform.
Most interestingly, the platform is aiming to make a further step and establish an in-house team capable of managing infrastructure assets over the long-term. This would enable them to take on board funds directly from investors who may not necessarily have their own specialist infrastructure teams.
No remedy for illiquidity yet
