when they are about to retire. They have a very limited risk tolerance at that point, so only they tend to invest in assets that look like gilts. This is changing in the Netherlands as they move from DB to collective DC. Instead of looking at a pension fund as some- thing that has to be completely immunised against all risk, the younger generation can take some of the risk for the older ones. Rhodes: Managing illiquids is an issue with DC. If you are in a project that looked good, started out good and you are tied in for a long time but is not working out then you have a problem. People are looking at the premium and asking how is this bet- ter than the liquid investments available. Why should we go with this? What is the benefit of allocating a proportion of our defaults to an illiquid asset? Halfon: Illiquid assets bring more diversification. Your expected return could be maintained, but your risk level falls. The point is, depending on the age of the members, you are not going to go above a 25% to 30% allocation to illiquids, unless the state ensures intermediate liquidity. If you invest 60% in illiquids, for example, and the state guarantees that you could drawdown five-tenths annually, this would allow investors to go more into illiquids, to generate more returns and reduce the immediate need for cash.
Does anyone have a final point to make on this topic? Frith: The economic impact of investing in infrastructure is enormous, whether it is employment or regional re-develop- ment. It is great that our pension funds have allocations to infrastructure, but the wider picture is what it does to economic growth. That is a good story. You should get as much money into infrastructure as you can if you are trying to rev the economy and drive future growth in the UK. Farquhar: It is not just infrastructure, but sustainable invest- ment, too. Part of it is to protect and ensure good outcomes for people and the planet, but the other part is to underpin growth, education and healthcare. Trow: Infrastructure is at the heart of that. If something is a good investment for society and the economy, it will pay for itself. If it is not happening from the institutional or the private sector, the government needs to step in as a facilitator and enabler. We are in a situation where we have tried to stimulate the econ- omy with monetary policy, which has just chased asset prices up. We can do fiscal policy, which is just a sugar rush, but the next step is fiscal but doing the stuff we have talked about. If it makes sense, it will pay for itself through tax revenue. If you get the incentives wrong it does not matter how much money you have.
You should get as much money into infrastructure as you can if you are trying to rev the economy and drive
future growth in the UK. Ted Frith, GLIL Infrastructure
Dec-Jan 2022 portfolio institutional roundtable: Build Back Better
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