UK infra, minus the fees

It’s always tricky commenting on big political announcements. Ambitions are usually grandiose, but practical details sketchy; ideas are half-formed; information tends to trickle down through carefully placed leaks; and the temptation to draw definitive conclusions from a partial picture is ever present.

So it’s with some trepidation – not to mention restraint – that we sifted through the latest round of rumours and leaks concerning UK Chancellor George Osborne’s ‘Pension Finance Initiative’ – the Treasury’s grand plan to get UK pensions to fund UK infrastructure to the tune of £20 billion (€24 billion; $32 billion).

With a new budget announcement just around the corner, some concrete details about the scheme have finally started to emerge, and what they reveal is certainly interesting, especially for infrastructure general partners (GPs). Because at the heart of Treasury’s pension plans lies what is effectively a low-cost GP designed to provide UK pensions with access to UK infrastructure.

Known as the Pension Infrastructure Platform (PIP), the new vehicle is shaping up to be a pension-owned GP that will pay no more than 0.5 percent in management fees and will be seeded by what Geoffrey Spence, the head of Infrastructure UK, called a “hard core of enthusiasts”. 

Speaking to IFAonline.co.uk, Spence said that “pension funds themselves would pay for the management directly, in the sense that they would own their own fund manager, and would work closely with government to facilitate the financing of infrastructure projects going forward in the UK”.

The rationale for this, the Infrastructure UK boss goes on to explain, is that “one of the relationships that seems to have gone downhill as a result of the credit crisis has been the relationship between pension funds and traditional fund managers in the UK, particularly in the infrastructure space”.

To which Alan Rubenstein, chief executive of the Pension Protection Fund, one of the trade bodies that has signed up to the government’s plan, added in the Guardian: “One thing pension funds have told us is that they don’t like unnecessarily costly fee structures.” 

In short, the Treasury is hoping to exploit alleged pension discontent with costly infrastructure GPs – and increasing pension appetite for infrastructure as an asset class – by providing these schemes with what it sees as a low-cost alternative to the traditional infrastructure fund.

Whether its low cost will be enough to convince UK pensions to overlook the other disadvantages and unknowns of the PIP – such as its lack of geographic diversification or how and if it will shoulder construction risk – remains to be seen. But £20 billion of capital hinges on the outcome.