U.S. Infrastructure and Pension Fund Investment

The world is truly getting smaller. A recent Wall Street Journal article describes the continued interest on the part of Japanese pension funds to directly invest in U.S. infrastructure projects such as a Michigan power plant. See "Japan's Pension Fund Association Targets Infrastructure Abroad" by Kosaku Narioka (July 2, 2013). Last year, the Ontario Municipal Employees Retirement System ("OMERS") joined forces with Japan's Pension Fund Association and a group led by Mitsubishi to invest $7.5 billion in roads, airports and other types of infrastructure projects. The goals are to raise $20 billion in total, avoid the expense of using intermediaries and gain exposure to long-term assets that are arguably a natural match to a defined benefit plan's long-term liabilities. See "OMERS, Japanese partners launch infrastructure fund" by Greg Roumeliotis (The Globe and Mail, April 26, 2012).

In their 2011 publication entitled "Pension Funds Investment In Infrastructure: A Survey," authors Raffaele Della Croce, Pierre-Alain Schieb and Barrie Stevens estimate the global infrastructure market at U.S. $50 trillion by 2030. This includes climate control projects. They add that, given the strain on numerous municipal and sovereign budgets and regulations that have impaired some banks' abilities to lend, infrastructure financing must depend on private sector finance.

With these opinions in mind, infrastructure investing by pension funds seems like a good idea. There is both a demand for long-term capital and a supply in the form of interested money in search of returns over time. Like any investment and/or strategy however, one needs to weigh risks against expected returns.

Currency risk and project completion risk are two considerations. Being able to obtain and properly interpret adequate performance reports is another concern. In "Insurers call for more transparent infrastructure investments," Risk.net contributor Louie Woodall (June 14, 2013) writes that opacity is a roadblock to having insurance company institutional investors allocate more money to this asset class. Regulations cannot be ignored either. Olav Jones, deputy director-general of Insurance Europe is quoted as saying that "...the Solvency II calibration for long-term investments does not account for the actual default of these assets, which is the primary risk insurers have to reserve for when using a buy-to-hold strategy." To the extent that pensions may be asked to comply with Solvency II mandates (or something similar for non-European funds), their trustees will no doubt want to ensure that capital is being pledged on the basis of "true" economic risks they deem to be associated with identifed investments.

Fiduciary liability is another factor that, in my view, is seldom discussed. Specifically, there are situations when a pension fund may feel that political pressure is being brought to bear to have trust money used to support a local project. When I recently spoke about pension governance before an audience that included public fund trustees, several persons complained about the exertion of uncomfortable "influence" to allocate assets in a way that could be said to fuel growth for a particular city or county or state but not necessarily fit with the pension fund's investment strategy. I served on a June 17, 2013 panel entitled "Fiduciary Responsibility for Management & Trustees." It was part of the Tri-State Institutional Investors Forum. The conference was produced by the U.S. Markets Center for Institutional Investor Education.

Published in 2008, interested readers may want to download "Pension Fund Investment in Infrastructure: A Resource Paper" by Larry W. Beeferman, JD. I have had the pleasure of speaking about governance and pension risk management at events put together by Mr. Beeferman, senior executive with the Labor and Worklife Program at Harvard Law School.

Another resource is "Trends in Large Pension Fund Investment in Infrastructure" by Raffaele Della Croce (OECD, November 2012). Based on his survey research of beneficial owners with control of more than $7 trillion of assets, he describes infrastructure investing as "attractive" because it can "assist with liability driven investments and provide duration hedging." Later in the report, he discusses the tradeoff between liquidity of these longer-term commitments with the chance to diversify a pension portfolio.

With planes, boats, trains, cars and fast technology, we can go from Peoria to Paris in hours. It is no surprise then that we see pension giants focused at home and abroad.

Source: http://feeds.lexblog.com/~r/PensionRiskMatters/~3/yXlPb7kpdpg/

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