Cover story
ing in assets which might already be on the top-end of the price range. But lack of scale might be an obstacle for consultants. “The question is how much can the fund man- agement industry invest for pension schemes. If that number is quite small, then it does not become commercially attractive for consultants to go and scope out whole industries. If they can’t scale it, they can’t offer it to their whole client base,” Ghosh warns.
ILLIQUID ISSUES
And while the growing importance of CDI can be an opportunity, the fact that many schemes are positioning themselves for the endgame could also be an obstacle. “This is not really an asset you would want to be holding if you were to position yourself for the endgame, say, a move towards a buy- out,” Ghosh adds. While Centrica is far off from considering a buy-out, liquidity remains a concern. “Let’s not forget that we have a lot of lia- bility hedging derivative expo- sure,” Ghosh says. “To back those derivatives, we need a core amount of liquidity in our portfolio,” he adds. “While it is a fantastic asset in theory, we have the operational challenges as well. If we had no boundaries on liquidity, we would quite happily hold another 5%. If we are not comfortable with illiquidity you might see 0%, any number in between is possible.”
ments in principle, it sees a potential con- flict of interest. “Pension funds are sup- posed to invest for the benefit of fund members and should not be used as a sub- stitute for investment that should be com- ing from the public purse,” Prentis says.
DC INVESTMENT
The situation is even more complex for DC schemes, where restrictions on costs and regulatory challenges remain a key obstacle to investing. Yet they have the potential to play an increasingly important role in infra- structure investment as their assets are expected to grow to £1.68trn by 2030, according to the Law Commission. As of 2016, about 4% of DC scheme assets were held in alternative investment classes, but only a fraction of that was in infrastructure.
A lack of daily pricing is one obstacle. Many
If we had no boundaries
on liquidity, we would quite happily hold another 5%. Chetan Ghosh, Centrica Pension Schemes
This ties into a broader criticism of pension scheme investment in infrastructure. Trus- tees could face a potential conflict of inter- est between that of their members and the investment needs of the nation. LGPS pools, in particular, have been heralded by former Chancellor George Osborne as Brit- ish wealth funds, similar to the infrastruc- ture-focused A$166bn (£88bn) Australian Future fund. Yet the inconvenient truth is that the assets in British LGPS pools do not belong to the British public, but ultimately to scheme members. While Unison’s general secretary, Dave Prentis, is open to infrastructure invest-
DC schemes operate through third-party platforms which offer daily pricing. However, while DC schemes generally have to comply with higher levels of transparency on pricing. Daniela Silcock, head of policy research at the Pensions Policy Institute, highlights that there is currently no legal impediment for investment platforms to disclose prices daily. Making infrastructure more accessible for DC schemes and retail investors is also on the agenda of the Financial Conduct Authority
(FCA). The regulator has
launched a consultation eaimed at making illiquid investments and patient
capital
more accessible to unit-linked funds. The regulator highlighted that the fund indus- try still had a lot of catching up to do in order to offer more competitive prices to DC workplace pension schemes. Investing in infrastructure property tends
30 | portfolio institutional | November 2019 | issue 88
to come with additional costs, such as valu- ation and solicitor fees as well as stamp duty. While these costs are excluded from the 0.75% charge cap applicable to all DC investments, they will have to be passed on to members. To make matters worse, the government is now considering including these costs in the charge cap, which would make it challenging for DC schemes to invest in illiquid assets. Silcock argues that the government could play an important role in making infra- structure more attractive for workplace pension schemes. “Clearly set out and impartial, verifiable evidence from an inde- pendent body, such as government or trade bodies, that long-term return from illiquid and alternative assets would provide a level of investment income above compensation for any extra costs and charges might go some way to overcoming these challenges,” she adds. While multi asset or diversified growth funds could be a way of circumventing these challenges, Silcock warns that DC schemes might find it hard to convince private equity funds to cater for their needs. Mark Fawcett, chief investment officer of
government-backed DC scheme NEST, argues that
infrastructure fund providers should put more effort into catering for the growing DC market. The DC fund has announced more than £1bn of commitments to three private credit funds in September and October alone. Amundi’s global real estate debt, BlackRock’s global infrastructure debt and BNP Paribas AM’s diversified global private credit fund are now included in NEST’s portfolio. Stephen O’Neill, NEST’s head of private markets, says fund providers should note the growing importance of DC schemes. “We are long-term investors – our youngest member is just 16 and she could be invest- ing with us for more than 50 years.” Demand for cash-flow assets and longer investment horizons offer room for growth in infrastructure. It is up to the regulator and the fund industry to offer the right vehicles to encourage further investment.
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