Public sector pension strikes: Big society investing

30th November 2011

After all, the grievances of those striking are estimated to cost the economy a cool £500m at a time when it desperately needs a boost. Opportunities will be lost, productivity will fall, and deals will go unclenched.

 

Solution-based pension planning

While public sector unrest rumbles on, financial institutions could come up with positive resolutions for both pension savers and the economy. Is there an area ripe for investment that would plug a portion of the pensions' gap as well as provide a vision for Britain's growth?

For starters, the Chancellor wants to invest a chunky £30 billion in infrastructure, and is turning to the National Association of Pension Funds and the Pension Protection Fund to help the cause. The decade-long plan will seek to attract £20 billion of investment from pension funds.

The cash, set to be put towards the construction of roads, railways and infrastructure projects, is aimed at aiding the economy as reports say it is sliding back into recession. Infrastructure development in places such as the US indicates how such investment powers an economy forward, and China's growth story in recent years provides further proof.

 

The positive proof

Pensions, which control billions pounds of money on behalf of their members, have been looking for new areas into which to invest.

The attractions of infrastructure are fairly obvious. You have a tangible asset – something you can see and feel.  And on the face of it, it should offer you some sort of fairly steady return, especially if it generates cash from paying customers. And it is for economic good – something that can't be said for sure of much at the moment.

In theory, the returns from infrastructure projects – inflation-linked and predictable over very long periods – are well suited to pension funds, which have to pay out inflation-linked annuities to retirees also for very long periods. They are a good diversifier away from equity funds.

 

A Big Society Fund

Gavin Haynes, investment director at independent financial adviser (IFA) Whitechurch Securities says: "Certainly it would make sense to provide incentives for investors to encourage them to invest alongside the Government to finance new infrastructure projects. This could be done through tax breaks or through structuring funds whereby the Government provides some sort of guarantee to minimise potential to lose money.

"I believe that investing in infrastructure funds provide some enticing opportunities and bring the government and investors together towards a common goal. With interest rates set to remain low, this area will prove popular due to its characteristics of providing long-term stable income streams, with relatively stable capital return and the potential to provide diversification within portfolios. Infrastructure spending is a core commitment of the UK and many other governments worldwide. The high barriers to entry, healthy yields, sustainable growth and predictable cash flows of infrastructure projects make them attractive to investors look to add alternative area to traditional asset classes." 

 

The negatives

But what could go wrong? Firstly, there is construction risk. It is very hard to ensure that a large construction project is built to the original time and cost. And operating a big project for many years also carries a risk. What would happen if you simply managed the asset badly?

The financial crisis has hit hard many of these investors and the big infrastructure funds created by the banks, making it difficult to refinance projects and blocking liquidity in the sector.

BT Pension Scheme, which is the UK's largest single pension fund and by reputation one of the more adventurous schemes, has put just £500m of its £37bn assets under management into infrastructure.

The problem is that most UK pension funds are simply too small and cannot afford the expertise needed to analyse and research the increasingly complex world of infrastructure investments, reports the Financial Times (paywall).

Jim Irvine, of Henderson Global Investors, says in the report: "The biggest buyers before the crisis were some of the European banks, who bought tens of billions of this stuff and the pension funds who might have invested didn't get to even look at it."

 

New models for investment

The emphasis in the chancellor's funding announcement fell primarily on infrastructure. However, aside from infrastructure, what other areas of the economy might be worth a punt given government investment – or just the potential for growth?

Ben Yearsley from independent financial adviser (IFA) Hargreaves Lansdown, points towards technology, and the spending on this area. The Chancellor announced an extra £200m for science in his Autumn statement. Among this, there is cash for high-performance computing and for a range of technology demonstrations, including £21m to start an innovative space radar project.

"The government clearly want to create a tech savvy world, and it is an area ripe for growth," he says. "If a company flourishes and shows long-term growth potential it might be worth investing in it, although at present this can only be done through venture capital funds (VCTs)."

Darius McDermott from independent financial adviser Chelsea Financial Services points towards social media as another opportunity, but adds: "Pick your battle carefully – you need to consider how these companies will make money tomorrow."

What do you think? Is there a sector that you think should be tapped into for investor and economic good?

 

More from Mindful Money: 

Inflation is silently stealing pensioner’s savings. Trouble brewing?

Teachers: Pensions "not as generous" as commentators say they are

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