Unlisted infrastructure on pension fund radar

Global pension fund allocations to unlisted infrastructure have grown in recent years but Australian pension funds continue to lead the way when it comes to actual investments according to a report published by the Organisation for Economic Cooperation and Development (OECD), which also called for more help from governments in enhancing the investment environment.

The move by Australian investment consultant Frontier in September last year to establish a specialist infrastructure advisory is testament to the greater number of infrastructure co-investment deals coming before its pension fund clients, which include large funds like AustralianSuper, HESTA and Cbus.

A report published by the OECD titled Pension fund investment in infrastructure, and written by independent consultant Georg Inderst, reveals pension funds are becoming increasingly attracted to the characteristics of infrastructure, which include stable and predictable cash flows and protection against interest rate and inflation risk.

However the report says governments could further help infrastructure developers tap into potentially important sources of financing, such as pension funds, by enhancing the investment environment.

This could be done by providing a sound institutional and regulatory environment for infrastructure investment; deciding on the utility and nature of potential private sector involvement; ensuring public and institutional support for the project and choice of financing; and making the co-operation between the public and private sectors work by promoting transparency and appropriate contractual arrangements, for example.

According to the report, Australian funds allocate approximately 5 per cent of their assets to infrastructure, with some funds investing more than 10 per cent.

Outside Australia, the weightings of unlisted infrastructure are considerably smaller. A client survey from Mercer conducted in 2008 shows less than 1 per cent of UK pension plans invest in infrastructure, with an average allocation by those plans of 2.3 per cent on an unweighted basis and 0.8 per cent on a weighted basis.

In Continental Europe, this figure is only marginally higher. Around 1.1 per cent of pension plans invest in infrastructure, with an average allocation of 2 per cent.

“Overall, the allocation of pension funds to new-style infrastructure funds has been growing in the last three years although from an almost nil base (outside Australia),” the report notes.

“Asset allocation weightings are still low on average, but there are a number of prominent examples of single big pension funds that have made substantial allocations (but not necessarily yet commitments of investments!)”

These include the Ontario Municipal Employees Retirement System (OMERS) in Canada, which has several billion Canadian dollars invested in infrastructure through its subsidiary Borealis Infrastructure, and the Ontario Teachers Pension Plan (OTPP).

In the US, the $173 billion California Public Employees Retirement System (CalPERS) adopted a new investment policy in 2008 with a target 3 per cent allocation, or $7.2 billion, in infrastructure. Other US pension funds such as the California State Teachers Retirement System (CalSTERS), the Washington State Pension Plan, Alaska Permanent Fund Corporation, Oregon PERD and the World Bank have all dipped a toe in the asset class.

The report notes that the majority of pension fund investments are through infrastructure funds, however some bigger Canadian and Dutch pension funds have started to invest directly. These pension funds are often co-investors with specialist funds, and hope to build up the internal expertise in-house over time.

In September 2007, Australia’s Victorian Funds Management Corporation joined forces with Canada’s OTPP to complete its first Australian direct infrastructure deal, with the funds taking a combined 48.25 per cent stake in Birmingham International Airport in England.

The €300 billion ($397 billion) Dutch pension fund APG has a target of 2 per cent for infrastructure in its strategic investment plan 2007-2009, amounting to about €6 billion. However the report notes that the actual investment level remains well below that target.

Other big pension fund investors in infrastructure in Europe include Denmark’s ATP (Arbejdsmarkedets Tillaegspension) and PKA, Dutch giant PGGM and Finland’s VER.

In the UK, Universities Superannuation Scheme (USS), BT and RailPen have all announced their intention to invest in infrastructure in recent years.

“In addition, several local authority schemes have already started the process, eg LPFA,” the report notes.

“A number of smaller and medium-sized pension funds, private and public, are currently joining in.”

Some reserve funds, established to fund state pension promises, have moved into the infrastructure space, including the Swedish buffer fund AP3, the Canadian Pension Plan (CPP) and the Irish National Pension Reserve Fund (NPRF).

In 2008, the NPRF announced a desire to invest €200 million, or 1 per cent of its assets, in domestic public sector infrastructure projects. The overall target allocation to the asset class for 2009 is 2 per cent.

France’s FRR has also added infrastructure to its strategic asset allocation.

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