Pilkington and EAPF increase infra for long-term returns

From toll roads to tunnels, investing in infrastructure has been high on the agenda for pension funds over the past few years, due to the ongoing low-yield environment prompting them to search for long-term, steady and sustainable returns.

A simple wind farm, for instance, is a very good project for a long-term asset owner like us

Mark Mansley, EAPF

In a letter to scheme members, chair Keith Greenfield said that towards the end of the year and following the completion of the latest triennial valuation, “the investment portfolio composition was such that the expected return was slightly less than the assumption used in the valuation”.

Consequently, the glass manufacturer’s scheme decided to boost its allocation to an infrastructure equity fund, run by Legal & General Investment Management, to 5 per cent.

In 2014, the £1.6bn pension fund had a 3.3 per cent allocation. It first committed to infrastructure equity in 2013, following the termination of a fund of hedge funds mandate.

EAPF relies on infrastructure equity

Pilkington is not the only scheme that has shown an increased interest in this asset class. Speaking at a panel session on investing in infrastructure during a Pensions Expert event held at the Financial Times last week, Mark Mansley, chief investment officer of the £3bn Environment Agency Pension Fund, said the fund had also recently boosted its infrastructure allocation to 5 per cent.

The Environment Agency scheme also has a penchant for infrastructure equity.

“We generally prefer equity to debt when it comes to infrastructure,” Mansley said. He noted that investing in infrastructure is about “trying to be smart” and “trying to find different opportunities and different areas to invest in”.

He said he did not mind broadening the scope of infrastructure. “I’m very happy to take risks knowingly, as long as funds are being honest [about] what they’re looking for.”

Simplicity preferred

Mansley said that simple structures with little or no leverage are often better for pension funds: “A simple wind farm, for instance...is a very good project for a long-term asset owner like us.”

He added that the scheme has some investments with a certain amount of leverage, but “we’re pretty allergic to too much”.

During the same panel session, Pete Drewienkiewicz, head of manager research at Redington, said the key point is to ensure “the leverage isn’t changing the characteristics of what you’re investing in” with regard to infrastructure equity.

He said it is important to still be able “to get a robust, resilient cash-flow instrument”.

Smaller schemes

Relatively large pension funds, like the Pilkington and Environment Agency schemes, have generally found it easier to commit to this asset class. But there are also increasing opportunities for smaller schemes to access infrastructure.

Last week, the Pensions Infrastructure Platform reached the first close of its multi-strategy infrastructure fund, which has £125m of pension scheme investor commitments and will invest directly in UK infrastructure.

The fund has a minimum commitment of £1m that enables even small pension funds to invest. There is also a co-investment programme for larger investors to obtain further benefits of scale.

In a statement released by PiP, chief executive Mike Weston said that reaching first close of the first fund is a key step in the development of PiP.

“The founding investor pension schemes, which have supported PiP from its establishment, have now achieved their objective of providing pension schemes of all sizes with an efficient route to direct ownership of infrastructure assets to enable greater access to infrastructure investment,” he said.