- The ideal asset class for pension schemes?
- Why pension schemes should look at infrastructure investment.
- How to invest in infrastructure: Public-Private Partnerships and the “Columbia model”.
- Who is doing what in Africa regarding infrastructure investment.
Pension schemes in Africa have generally invested in a conservative manner with government debt and listed equity forming the majority of portfolio allocation, perhaps diversified with direct property for the larger schemes. Therefore, the investments exhibit significant concentration and do not use the full range of asset
classes, both mainstream and alternative, where allowed by the regulator.
Additionally, pension schemes in Africa have had to (and most likely will continue to have to) grapple with high inflation. Another form of inflation that pension schemes will – thankfully – need to tackle is rising life expectancy.
Ultimately consideration of investment in an alternative asset class stems from recognition that the available listed assets do not give a fair representation of the GDP of a country. The fixed income available in African countries is overwhelmingly government (or other public entity) debt rather than corporate debt. And stock
markets show significant overweight relative to GDP to certain sectors, most notably financial.
Infrastructure is the basic physical systems of a business or nation: transportation, communication, sewage, water and electric systems are all examples of infrastructure. These systems tend to be high-cost investments and are vital to a country’s economic development and prosperity. Projects related to infrastructure improvements may be funded publicly, privately or through public-private partnerships.
Public-private partnerships, or PPP, are gaining traction across Africa as countries seek to balance their infrastructure desires without excessive debt. PPP projects often have requirements for part of the financing to be local currency and this is where a local institutional investor such as a pension scheme can actively participate. Today there is a favourable economic environment for providers of local capital to infrastructure. PPP provides a way for a pension scheme to lend to government in a targeting way (as opposed to the untargeted way that purchasing government debt represents) and gain from investing alongside other private sector investors.
Pension schemes in Australia and Canada were the amongst the vanguard of those investing in infrastructure. In the UK there are two consortiums of the pension schemes investing in infrastructure. The Pensions Infrastructure Platform was formed in 2011 and both public and private schemes are members. In 2015 several major Local Authority pension schemes formed GLIL Infrastructure. Both PIP and GLIL have approximately £1.5bn each. More recently we have seen some South African pension schemes start to invest in infrastructure. And in South America pension schemes in Columbia are regular investors in infrastructure projects.
Infrastructure can be accessed in a fixed income or equity manner, and for pension schemes it is the fixed income approach that is generally the more appropriate.
Such an investment provides:
- A fixed income investment with longer maturity than usually available.
- And one with higher yield than available on government debt.
- With diversification from existing assets.
- An income stream backed by a physical asset.
- And can be an index-linked type of fixed income, thereby giving inflation protection.
Infrastructure may also be of the form of an index-linked rather than conventional fixed income. A long-dated index-linked bond is the asset a pension scheme desires to give the best match to its liabilities, irrespective of whether DB or DC. A long-dated index-linked bond is the risk-free asset for a pension scheme.
An infrastructure investment can be win-win: pay higher pension to tomorrow’s pensioners and improve the environment in which they retire. However, there are aspects concerning infrastructure that require extra management:
- It is an unlisted and illiquid asset class which limits scheme allocation as a percentage of total portfolio.
- It has a large minimum size for allocation in absolute terms.
- It is complex, needing specialist expertise.
All these aspects can be overcome and should not prevent serious consideration by pension schemes to the asset class of infrastructure. Kenyan pension schemes will be used as a topical case study to see how these challenges are being addressed to allow their first investment in a PPP project to be made. Moreover, development agencies such as the World Bank and the African Development Bank are spending substantial time and money to assist pension schemes who wish to give infrastructure serious consideration.