Sky-high demand for UK green infrastructure assets means pension funds are often unable to invest as much as they would like in the asset class, industry figures have argued.
While the UK government has called for pension funds to support the country’s effort to “build back better”, some schemes have had to limit their ambition to invest in UK green infrastructure due to scarce supply, Pensions Expert’s sister title MandateWire reported.
Speaking at the Responsible Asset Owners Global Symposium, Europe 2021 conference, David Russell, head of responsible investment at USS Investment Management— manager for the £80.6bn Universities Superannuation Scheme — said UK pension funds are hungry for domestic infrastructure investments.
The perception that UK schemes do not invest much in strategic assets, for example in comparison with their Australian or Canadian counterparts, is not a “fair” one, he said.
One of the challenges we have is that there aren’t that many assets out there, and those that are out there we are frequently outcompeted on
David Russell, USS Investment Management
“USS and other UK pension funds invest in UK infrastructure and would like to invest more in UK infrastructure. We pay UK pensions, so having assets that generate cash flows in sterling is actually helpful for us,” he explained.
Competition and scale
In August, Prime Minister Boris Johnson and chancellor Rishi Sunak published a letter to the pension fund industry arguing that “UK institutional investors are under-represented in owning UK assets”. They urged funds to “invest more in long-term UK assets”, including green bonds and green infrastructure, in order to support the recovery from the Covid-19 pandemic.
However, pension funds are facing a number of barriers that are preventing them from accessing infrastructure investment opportunities.
“One of the challenges we have is that there aren’t that many assets out there, and those that are out there we are frequently outcompeted on,” Russell explained.
Commercial fund managers and larger funds, such as sovereign wealth funds, have significant pots of capital to put to work and are often prepared to pay more for the same assets, accepting lower returns in the long run, he said.
Michael Marshall, head of sustainable ownership at Railpen, which manages the circa £35bn Railways Pension Scheme, said competition for these assets also comes from listed companies “as they try to transition from legacy business models to future-fit business models”.
While bigger schemes such as the USS look to acquire assets directly, smaller schemes that are unable to do so have to invest via infrastructure funds, incurring higher fees. However, the pooling process that local authority pension schemes are currently undergoing might help in terms of investment scale, Russell suggested.
Stimulating supply
While the UK government might not be able to solve the issue of demand, clarity of policy and stimulating supply could improve the situation.
Marshall noted that part of the problem is the supply-to-demand ratio and huge demand for infrastructure assets, which are not necessarily in the government’s control.
“What I would like to see is policy stability and policy certainty that last beyond one political term,” he added.
However, according to Morten Nilsson, chief executive of the £57.5bn BT Pension Scheme, the government might be able to stimulate supply, for example, through the UK Infrastructure Bank.
The UK Infrastructure Bank launched in June this year with the aim of supporting infrastructure that drives local economic growth or helps tackle climate change through loans, credit enhancement and equity investments. It has a £22bn budget, split between £12bn of equity and debt capital, and the ability to issue £10bn of government guarantees.
The bank might be able to adjust the risk profile of UK green infrastructure investments to make them more appealing to cash flow-negative defined benefit schemes such as the BT Pension Scheme, Nilsson suggested.
“Our cash-generation needs are quite high, but that doesn’t mean we can’t take these assets. It just means that we would be very interested, for example, in the UK Infrastructure Bank taking some of the first loss risk out of those opportunities. We would be very interested in debt opportunities coming out of this too,” he said.
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Nilsson argued that the focus on price has perhaps obscured the fact that UK pension funds are particularly well-positioned to handle these assets.
“All pension schemes in the UK are fully aligned with the UK economy – our members live here, we are sterling-based and pay our benefits in sterling, we have our sponsor organisations working in the UK [and] all our staff work in the UK. We can’t do bad things to these assets and then just run away,” he said.
“I think the UK has missed a bit of a trick in being so focused on price with these assets, instead of thinking that there is an alignment here that could work really well for society and for investors like us.”
This article originally appeared on MandateWire.com
